I recently joined forces with CEOs from 120 institutional investors urging the Group of 7 (G7) finance ministers and central bank governors to support the inclusion of a long-term emissions reduction goal in the international climate agreement to be negotiated in Paris in December, 2015. I wanted to take this opportunity to explain why.
On November 30, 2015 Paris will host 40,000 participants from around the world for the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change (aka COP21). The “Framework Convention” adopted in 1992 and ratified by 196 nation states, “is a universal convention of principle, acknowledging the existence of anthropogenic (human-induced) climate change and giving industrialized countries the major part of responsibility for combating it.” This framework needs to be adopted via a protocol.
The conference has been convening annually since 1992 to determine how to achieve a reduction in greenhouse gas emissions that will limit global warming to 2°C (notwithstanding the widely held belief that even a 2°C temperature rise will result in irreversible damage) as well as how to adapt to the climate change that is already “baked in” from greenhouse gases being emitted now that will stay in the atmosphere for hundreds, even thousands of years.
While the achievements of past COP conventions do not bode well for achieving an enforceable and universally accepted agreement (The Economist rightly summed up past conferences as a “Theater of the Absurd"), the aim in Paris is, for the first time, to ratify exactly that.
It is increasingly critical that the COP Framework Convention finally succeeds.
Why Are Emission Reduction Goals Important to Investors?
First Affirmative’s investment philosophy embraces the effective management of risk. Traditionally, most investment risks are evaluated and managed through a number of techniques and principles, including diversification—investing assets across a wide range of asset classes, industries, and companies.
The impact of climate change, however, poses a different type of risk to investors: systemic risk. As its name implies, systemic risk doesn’t just impact a particular stock or industry. Instead, it can cut across entire markets and, in the case of climate change, the entire globe. Climate change presents far-reaching, and highly unpredictable, environmental and social risks that cannot be minimized through diversification alone.
Mitigating the risks of climate change will require coordinated, multi-pronged, global action. Unfortunately, the current lack of clear and enforceable global country-level commitments and strategies presents tremendous uncertainty to investment professionals. In order for First Affirmative, and the wider investment industry, to do our job effectively we need reasonable certainty that there will be universal commitment to implement any plan, including a clear understanding of the strength and depth of emission cuts therein.
More broadly, we need to understand the level of investments that will be made in new technologies and renewable energy, and the opportunities that these present for investors. As always, there will be investment winners and losers. As the letter points out, “From an investor perspective, this uncertainty and the strength and depth of emissions cuts which are agreed will have implications for the ability of investors to manage portfolios, correctly value energy sector and other assets impacted by climate change, seize the low-carbon opportunities, and ultimately fulfil fiduciary responsibilities.”
Why the Group of 7 Is Key
The Group of 7 (G7) consists of the finance ministers and central bank governors of seven major advanced capitalist economies—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. These seven developed nations represent a major share of global emissions and will have tremendous influence in the negotiation of a global agreement. The decisions finance ministers in these countries make with regard to their national emissions reduction targets, as well as their demonstrated commitment to meeting these targets, will set the tone and likely determine the success or failure of the negotiations in Paris. This is why our investor group decided to reach out to this key group of decision-makers.
Countries have been asked to make their climate change plans public—and some major emitters such as the European Union, the United States, and China have already published their plans up to 2025/2030. However, as our letter points out, many countries, including members of the G7, are late in submitting their climate plans when they should be taking a leadership role.
Subsequent to our letter, the G7 met in early June, agreed to limit global warming to 2°C, declaring that “Urgent and concrete action is needed to address climate change.” While the agreements made are not binding, we hope that these discussions portend the tenor of COP 21, and result in the adoption of a binding protocol.
Why Are Emission Reduction Goals Important to First Affirmative?
Investment managers are prone to talking about what we do through the lens of economic and financial concepts. For example, we explain the management of risk through diversification, the relationship of risk and return, the importance of fiduciary responsibility, etc. But in reality, the work we do day-in-and-day-out for clients of First Affirmative is in service of a much bigger vision:
We envision a world in which every child is safe, healthy, and free. We work with money as a tool for transformation toward a socially just, truly sustainable future for all.
Our collective efforts to address climate change, or lack thereof, significantly underpin this vision. The need to use money and investments as tools for transformation has never been clearer.
NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.
Posted: July 10, 2015