Preparing for an inevitable policy response to climate change
By Nathan Fabian |
Updated: 2019-01-24 10:09
China has clearly established itself as a positive force in international climate negotiations. Its backing of climate policy was fundamental to the Paris Agreement and its presence was keenly felt at the recent Climate Change Conference (COP 24) in Katowice, Poland. Chinese central bank’s leadership on greening financial flows has inspired a number of similar initiatives in the European Union, United Kingdom and Canada over the past 18 months, including policy measures on climate-related disclosure.
At COP24, a compromise reached by China, the United States and the EU opened the way for the adoption of a single set of rules that will apply to all countries for reporting their emissions, replacing an earlier version that had different rules for developed and developing countries. The rules create a system for each country to disclose its emission and climate targets and for measuring how the world is doing relative to the 2 degrees centigrade goal in the Paris Agreement.
Finance is key to meeting the goals of the Paris Agreement. The move to a green economy requires significant investment. The Organization for Economic Cooperation and Development estimated that from 2016 to 2030, an additional $600 billion infrastructure investment per year is needed to meet Paris Agreement climate goals across energy, transportation and other sectors. The proliferation of instruments such as green bonds is helping to finance this transition.
Investors play a vital role, both in liaising with policymakers to strengthen climate policies and in capital reallocation away from carbon intensive industries. Climate change is now recognized by many investors as the single greatest threat to their portfolios.
Michael Mann, the distinguished professor of atmospheric science and director of the Earth System Science Center at Penn State University, noted in an interview last summer that what we saw “across the Northern Hemisphere [last summer] was extreme weather in the form of unprecedented heat waves, droughts, floods, wildfires. In isolation, it might seem like any one of these things could be dismissed as an anomaly, but it's the interconnectedness of all these events and their extreme nature that tells us that we are now seeing the face of climate change. The impacts of climate change are no longer subtle.”
And the statistics bear him out. The 10 worst climate-linked disasters of the past 12 months caused at least $85 billion worth of damage worldwide.
Moreover, in addition to physical risks, investors could also have capital at risk from the energy transition, where due to policy and technological change the world may move underneath their investments, impairing returns.
An International Energy Agency study of business as usual vis-à-vis the goals of the Paris Agreement identified a possible $26 trillion in capital misallocation by 2040 due to a misread by the private sector in the longer-term trend towards a low carbon transition. The growing gap between what was promised three years ago at Paris and the reality of government energy policy today creates risks and opportunities for financial institutions.
The position of the current US administration makes the prospect of this policy gap narrowing over the next two years, at least, unlikely. Yet, the case for climate action is likely to become increasingly apparent. The growing frequency of extreme weather events could make the public more sympathetic towards this issue and the falling price of the clean energy solutions makes low carbon policy interventions less costly to implement. As such, we believe, investors need to prepare for an inevitable policy response to climate change, in the form of an abrupt tightening of low carbon policy as countries rush to cut emissions.
At present, such a scenario may seem fanciful. Yet higher levels of global warming will be very disruptive for economies, key national infrastructure, investors, companies and the public at large. These factors, coupled with the mechanisms of the Paris Agreement, notably the five-year stocktake of countries’ performance at reducing emissions, make it feasible, in our view, that governments will want to intervene. The big policy levers that could be pulled to deliver this response – carbon pricing, green infrastructure banks, industry regulation and emission standards, national and sectoral carbon budgets – are arguably well known, though implementation has so far been selective and limited to a few countries.
By taking action today, investors can reduce the risks of being caught out by a sudden repricing of energy intensive assets. A key preparatory step ahead of a policy response is to identify assets that could be at risk. The recommendations from the Taskforce on Climate-related Financial Disclosures, or TCFD, provide a framework through which investor and companies can assess, manage and reduce their exposure to climate-related risks. The TCFD is a form of reference for the UK – China Climate and Environmental Information Disclosure pilot. This government backed three-year initiative, involving 10 financial institutions (including AVIVA, Brunel Pension Partnership, China Asset Management, the Environment Agency Pension Fund, E-Funds, HERMES, HSBC and ICBC), seeks to enhance disclosure practice in both countries. The first progress report including 10 case studies and examples of how climate-related disclosures are being used in investment practice has recently been released.
Continuing to strengthen disclosure frameworks, together with corporate engagement on business strategy for the energy transition as well as seeking opportunities in low carbon sectors, will be crucial for investors in preparing for a potential policy jolt on climate change. Incorporating this perspective will help investors and economies navigate their way through the likely far-reaching impact of the climate-related macroeconomic and policy change ahead.
Nathan Fabian is chief responsible investment officer at the Principles for Responsible Investment. The PRI, with more than 2,200 signatories representing $82 trillion in financial assets, is the world’s largest investor network on environmental, social and governance issues.
The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
China has clearly established itself as a positive force in international climate negotiations. Its backing of climate policy was fundamental to the Paris Agreement and its presence was keenly felt at the recent Climate Change Conference (COP 24) in Katowice, Poland. Chinese central bank’s leadership on greening financial flows has inspired a number of similar initiatives in the European Union, United Kingdom and Canada over the past 18 months, including policy measures on climate-related disclosure.
At COP24, a compromise reached by China, the United States and the EU opened the way for the adoption of a single set of rules that will apply to all countries for reporting their emissions, replacing an earlier version that had different rules for developed and developing countries. The rules create a system for each country to disclose its emission and climate targets and for measuring how the world is doing relative to the 2 degrees centigrade goal in the Paris Agreement.
Finance is key to meeting the goals of the Paris Agreement. The move to a green economy requires significant investment. The Organization for Economic Cooperation and Development estimated that from 2016 to 2030, an additional $600 billion infrastructure investment per year is needed to meet Paris Agreement climate goals across energy, transportation and other sectors. The proliferation of instruments such as green bonds is helping to finance this transition.
Investors play a vital role, both in liaising with policymakers to strengthen climate policies and in capital reallocation away from carbon intensive industries. Climate change is now recognized by many investors as the single greatest threat to their portfolios.
Michael Mann, the distinguished professor of atmospheric science and director of the Earth System Science Center at Penn State University, noted in an interview last summer that what we saw “across the Northern Hemisphere [last summer] was extreme weather in the form of unprecedented heat waves, droughts, floods, wildfires. In isolation, it might seem like any one of these things could be dismissed as an anomaly, but it's the interconnectedness of all these events and their extreme nature that tells us that we are now seeing the face of climate change. The impacts of climate change are no longer subtle.”
And the statistics bear him out. The 10 worst climate-linked disasters of the past 12 months caused at least $85 billion worth of damage worldwide.
Moreover, in addition to physical risks, investors could also have capital at risk from the energy transition, where due to policy and technological change the world may move underneath their investments, impairing returns.
An International Energy Agency study of business as usual vis-à-vis the goals of the Paris Agreement identified a possible $26 trillion in capital misallocation by 2040 due to a misread by the private sector in the longer-term trend towards a low carbon transition. The growing gap between what was promised three years ago at Paris and the reality of government energy policy today creates risks and opportunities for financial institutions.
The position of the current US administration makes the prospect of this policy gap narrowing over the next two years, at least, unlikely. Yet, the case for climate action is likely to become increasingly apparent. The growing frequency of extreme weather events could make the public more sympathetic towards this issue and the falling price of the clean energy solutions makes low carbon policy interventions less costly to implement. As such, we believe, investors need to prepare for an inevitable policy response to climate change, in the form of an abrupt tightening of low carbon policy as countries rush to cut emissions.
At present, such a scenario may seem fanciful. Yet higher levels of global warming will be very disruptive for economies, key national infrastructure, investors, companies and the public at large. These factors, coupled with the mechanisms of the Paris Agreement, notably the five-year stocktake of countries’ performance at reducing emissions, make it feasible, in our view, that governments will want to intervene. The big policy levers that could be pulled to deliver this response – carbon pricing, green infrastructure banks, industry regulation and emission standards, national and sectoral carbon budgets – are arguably well known, though implementation has so far been selective and limited to a few countries.
By taking action today, investors can reduce the risks of being caught out by a sudden repricing of energy intensive assets. A key preparatory step ahead of a policy response is to identify assets that could be at risk. The recommendations from the Taskforce on Climate-related Financial Disclosures, or TCFD, provide a framework through which investor and companies can assess, manage and reduce their exposure to climate-related risks. The TCFD is a form of reference for the UK – China Climate and Environmental Information Disclosure pilot. This government backed three-year initiative, involving 10 financial institutions (including AVIVA, Brunel Pension Partnership, China Asset Management, the Environment Agency Pension Fund, E-Funds, HERMES, HSBC and ICBC), seeks to enhance disclosure practice in both countries. The first progress report including 10 case studies and examples of how climate-related disclosures are being used in investment practice has recently been released.
Continuing to strengthen disclosure frameworks, together with corporate engagement on business strategy for the energy transition as well as seeking opportunities in low carbon sectors, will be crucial for investors in preparing for a potential policy jolt on climate change. Incorporating this perspective will help investors and economies navigate their way through the likely far-reaching impact of the climate-related macroeconomic and policy change ahead.
Nathan Fabian is chief responsible investment officer at the Principles for Responsible Investment. The PRI, with more than 2,200 signatories representing $82 trillion in financial assets, is the world’s largest investor network on environmental, social and governance issues.
The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.
All rights reserved. Copying or sharing of any content for other than personal use is prohibited without prior written permission.
