The risks associated with climate change have the potential to undermine the longevity of investments worldwide. This is because climate change impacts every investment and, therefore, it must become a central consideration for every portfolio level investment decision.
This shouldn’t be news to anyone – there has been a surge in reports and assessments recently, spelling out these risks, but also the opportunities for those investors that take this reality on board. Firstly, Citibank’s ‘Global Perspective & Solutions’ Report1, released in August, calculated that the necessary total spend on low-carbon energy over the next quarter century will be over USD190 trillion.
‘Inaction’ on climate change will cost more
This figure is less than the USD192 trillion estimated in the report’s ‘business as usual’ scenario – which essentially concludes that ‘inaction’ on climate change will cost more.
Then, in September, Mark Carney, Governor of the Bank of England, stated that climate change is a major financial and economic risk for investors and, more broadly, for the wider global economy. His outlook was further reinforced by Christine Lagarde (Managing Director of the International Monetary Fund), during the annual meeting of the World Bank Group and the International Monetary Fund. She warned that failure to take much needed action on climate change would condemn humanity to unacceptable levels of risks and impacts.
What all this means is that investors now have a responsibility to generate more investment into better quality, more efficient infrastructure in order to maximize their returns over the long term. But despite this somewhat sobering outlook there is cause for optimism.
Indeed, there have been many promising signals that investment is already moving in the right direction. Take, for instance, the USD100 billion climate finance package – a pledge made by developed countries to developing ones as part of international efforts to keep a global temperature rise under 2 degrees C.
The transition to a climate resilient world
A recent assessment by the OECD indicates that financial flows from North to South may have already reached over USD60 billion required for this package.
In other words, the world is actually on its way to deliver the pledge by the agreed date of 2020.
And while trillions of dollars will be needed to catalyze a transition to a low carbon economy the USD100 billion represents not only a politically important plank of international cooperation, but an important vehicle for assisting the climate action ambitions of the poorest and more vulnerable countries.
Forward-looking investors can accelerate and, ultimately, aid the speed and scale of the now unstoppable transition to a climate resilient world. As the suppliers of capital to corporations, small and medium-sized enterprises, governments and infrastructure projects, you play a pivotal role in facilitating the orderly phasing down of fossil fuels and the ramping up of clean energy and clean tech enterprises with the necessary investment that takes the world far beyond theory and into a very different development path.
The New Climate Economy’s Report – Seizing the Opportunity2 – puts a figure on this, recommending an annual spend of at least one trillion in clean energy. Currently the global spend is around USD270 billion a year – a far bigger figure than many had thought possible just a decade ago but still behind what is needed.
Fund managers and investors can provide confidence to governments
Ahead of the Paris climate negotiations in December, fund managers and investors can provide confidence to governments who are on the brink of inking a new, universal climate agreement.
Specifically, in the final weeks before the climate negotiations, commitments and announcements by investors can demonstrate that capital is shifting to support a just and ambitious transition. There are many opportunities for investors to demonstrate their climate leadership, including: engaging with your companies on climate change; measuring your investment portfolio carbon footprint; reallocating capital away from carbon risk assets; and reinforcing your efforts through advocacy.
It’s financially lucrative
Essentially, it is not just prudent to invest in low-carbon technologies and infrastructure, it is financially lucrative.
An organization like Allianz Global Investors, which is part of a company with a 125-year history, is used to thinking in the long term. It is this perspective that makes you acutely aware that business of the next 125 years cannot be the same as the last. We need a new model of growth that can thrive in the vastly different risks that we face now, into the second half of this century and beyond.
You have a unique voice that simultaneously understands risk and understands climate change. Adopting an explicit long term vision will send a message to shareholders that value will be maintained, even as the physical impacts of climate change manifest themselves globally.
Paris will not be the end
The Paris agreement is not an end in itself. It needs to deliver the pathways and the policies you need to put us on the road to a decarbonization of the global economy and a point in the second half of the century were emissions are so low they can be easily safely absorbed by healthy forests and other natural systems. Investing in these will be just as important as investing in clean energy and low carbon infrastructure.
2016 will be a year in many ways just as important as 2015 and the new agreement, because this is just the beginning of a new journey for everyone on this planet.
You are in a unique position to demonstrate that this signal has been received loud and clear. In terms of taking decisive action on climate change, you can help show that while we may not have reached the summit, we have at last arrived at basecamp.