Will Big Finance Join the Fight to Curb Global Warming?

(AP Photos/Francois Mori)

French President Francois Hollande, right, and other world leaders applaud global climate agreement.

World leaders have approved a historic agreement that they hope will forestall the global droughts, famines, and superstorms unleashed by climate change, but they won’t be able to follow through without a key player: the finance sector.

To move the needle in any meaningful way toward a low carbon economy requires money. Lots of it. For years, the arguments for preventing runaway climate change have been largely scientific, ethical and moral. Now, a strong new case is being made that combating global warming makes economic sense, and that could significantly change the debate.

“Investment managers need to integrate climate change into their fiduciary duties, given both the opportunities the low-carbon economy presents, as well as the great financial risks posed by the impacts of climate change,” said Sébastien Lépinard, founder of the global investment firm Next World Group.

Lépinard is not the only investor worried about global warming’s economic implications. In Paris last week, more than 150 global finance professionals, who together oversee $1 trillion in assets, gathered to discuss how to accelerate a transition to a low-carbon economy. The so-called Climate & Capital event was organized by Next World Group; Amplifier Strategies, a strategic firm advising philanthropists and social enterprises, and several other energy-focused think tanks and grant makers.

The financial community is starting to see that it can fight climate change while still getting a good return on investment, said Lépinard. What investors need now, he argues, are the tools to actually do it.

“There is a lot of talk about the need to finance the climate change issue and finding climate change solutions, but there is a deep gap between the environmental imperative and the investor’s ability to act, particularly for private investors,” he said.


IT'S TOO EARLY TO SAY exactly what will come of the Paris climate summit, officially the 21st Conference of Parties of the United Nations Framework Convention on Climate Change, or COP21 for short. But it’s clear that in the near future greenhouse gas emissions will become an economic liability, and that being a polluter will be pricey.

That’s bad news for investors in fossil fuel companies, whose value is tied to proven reserves. Right now, oil in the ground is like money in the bank. But that may not be the case much longer. The world houses more fossil fuel reserves than scientists believe we can burn without facing catastrophic consequences. So to stay within our “carbon budget,” some coal, oil, and gas will have to stay in the ground.

This will leave investors in fossil fuel companies with what’s known as “stranded assets” as those fossil fuels we can’t burn (and companies can’t sell) incur profit losses. The upshot will be an oil market in which “peak carbon rather than peak oil becomes the primary driver of oil prices,” predicts a report released early this year by Deutsche Bank Research.

If this “leave it in the ground” policy becomes economic reality, then fossil fuel companies and those invested in them—including many pension funds—will see their fortunes dashed.

Assets may also become stranded because producing that coal, oil, or gas costs more than the market is willing to pay, or because innovation in other sectors, such as clean energy and efficiency, simply make those fossil fuels uneconomical.

The value of such stranded assets could soar as high as $100 trillion over the coming decades, predicts a report from Citi GPS: Global Perspectives and Solutions, a research arm of Citigroup. Already energy companies heavy in fossil fuels are getting killed in the market because of low prices, a huge glut and falling demand. Looming regulatory changes or a carbon tax would only worsen that trend.

Such climate-linked economic concerns have helped spur a global movement aimed at divesting institutions from fossil fuels. Leading the charge has been the activist group 350.org, which reports that nearly 500 institutions holding more than $3.4 trillion in assets have made some form of commitment to divestment.

The campaign’s centerpiece has been the moral imperative to act on climate change, but now organizers also have hard data to back up an economic imperative as well.

And this, according to Lépinard, is the key to winning over investors. “There is only a limited amount of investors who can actually integrate the moral imperative into their investment strategy,” he said. “A lot of the money is managed in a very strict fiduciary manner where it is not about saving the world but making money for clients, trustees, family members.”

The Rockefeller Brothers Fund made waves last year when it announced plans to gradually divest from fossil fuels and pull out immediately from coal and tar sands investments. The move came amid a flurry of research reports from big banks, including HSBC, Deutsche Bank, Standard and Poor’s, Citigroup, and the Bank of England, pointing to the economic risk posed by fossil fuels and to the promise of green investments.  

“Some of the largest and most conservative financial institutions have published papers on this stuff that says: ‘If we were to make the type of transition that’s necessary to avoid the catastrophic levels of climate change it would be more beneficial to our economy than not,’” said Brett Fleishman, a senior analyst at 350.org.

The Citigroup report reached a similar conclusion. “The incremental costs of following a low carbon path are in context limited and seem affordable, the 'return' on that investment is acceptable and moreover the likely avoided liabilities are enormous,” Citi’s report found. “Given that all things being equal cleaner air has to be preferable to pollution, a very strong ‘Why would you not?’ argument begins to develop.”

When Citigroup, one of the world’s largest financial institutions, is on the same page as global grassroots environmental activists, the economic case for acting on climate change is no longer in dispute.

Fleishman hopes that this message gets out to a wider audience, beyond the folks reading financial industry white papers: “We need help from the mainstream economists of the world, the mainstream investors of the world, that transitioning to a low carbon economy, integrating carbon risk into your investment strategy, is not only the moral thing to do, but the prudent thing to do.”


FOR LÉPINARD, THAT MEANS TALKING to investors about not just the economic promise of a low carbon economy, but also the practicalities of how to manage a portfolio with climate change in mind.

“Investors need to know how they can integrate climate change into their investment portfolios and investment strategy from an analytical standpoint,” said Lépinard. “They need data. They need practitioners to tell them how climate change will affect investable assets, where it is going to strike, how and when.”

In 2014, investments in low-carbon, climate-resilient growth, or “climate finance,” totaled $391 billion, according to the Climate Policy Initiative, which works to boost private investments in climate change mitigations. And from 2011 to 2014 that number grew to just over $1 trillion.

But it’s a still a far cry from what’s needed. According to CPI, investments in energy efficiency and low carbon technologies need to reach $16.5 trillion in order to curb warming to 2 degrees Celsius above pre-industrial levels. The stated goal of the Paris climate agreement is to keep emissions “well below” this 2 degree level.

Some of these investments will need to come from public sources and some will be driven by the private sector. Investors are beginning to step up. The International Development Finance Club, which is composed of 23 development banks across the world, reported committing $98 billion to climate finance in 2014.

This summer marked the launch of the PRIME Coalition, a nonprofit that helps philanthropies make investments directly into ventures that combat climate change. And just before the Paris summit kicked off, philanthropist Bill Gates announced a new partnership, the Breakthrough Energy Coalition, of billionaires and investors around the world who are teaming up to fund clean technology innovation. This group includes philanthropist and business leader Tom Steyer, who also spoke at the Climate & Capital conference.

Another conference speaker was Frederic Samama, the deputy head of institutional and sovereign clients at Amundi, one of the top asset management firms in Europe. Amundi was a founding member of the Portfolio Decarbonization Coalition, which now also includes massive global investors Allianz and ABP. The coalition has a total of 25 investors committed to gradually decarbonizing $600 billion in assets.

Samama’s presence signaled just how far energy sector investors have moved in recent decades toward building a cleaner economy.

“The big drivers of capital will be when we put a price on carbon or there is some incentive that will increase the potential return for a given risk,” said Lépinard. “When the policy makes it more attractive, then more money will flow.”

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