By Phil Vernon, CEO of Australian Ethical.
We have an agreement! After 21 years we have a legally binding commitment for countries to recognise the risks of climate change and reduce their emissions. The result in the end was far better than many expected. Its significance in my mind lies in the following:
1. Having an agreement at all. Having a global, legally binding framework to guide our politicians is critical and witnessing the process up close gave me a healthy appreciation of the challenges of securing agreement. The fact that an agreement, any agreement was secured, is an amazing achievement;
2. The level of ambition. Since Copenhagen the world has focused on keeping the level of warming below 2 degrees above pre-industrial levels. Given that a 2 degree world would be a disaster we had given ourselves a false sense of security that this was a target that we could run the risk of overshooting. To secure the goal of “well below 2 degrees” was an achievement in itself. The inclusion of a further ambition of 1.5 was a very welcome addition and we owe a gratitude to those nations that championed it;
3. An acknowledgment that current pledges are weak. From day one this provides a strong basis for challenging the ambition of government policies;
4. 5 yearly reviews. The agreement to review the commitments every 5 years provides flexibility to ramp up the pressure;
5. Transparency and accountability. The system of measurement and transparency provides a mechanism to hold our governments to account.
So while many will argue that it doesn’t go far enough, we are far better off with it than without it. But it is insufficient on its own. Change will still only come with domestic political, corporate and investor will.
As far as political will goes, we know our current domestic policies are woeful. Perhaps this agreement is what is needed for the current government to have greater influence over the more conservative forces within their ranks. With a legally binding agreement, a higher ambition, increased transparency and five yearly reviews, there are less places to hide and perhaps (dare we dream it) it serves as a framework and a catalyst for a more bipartisan commitment to a stable, long term set of policies. One of my favourite quotes from the conference came from the Executive Director of the International Energy Agency, “while variability of renewable energy is a challenge … variability of policies poses a far greater risk”.
Beyond the policy settings, ultimately it is capital that provides the solution. We need capital to flow from financing the old economy to the new. And, we need lots of it to move and we need it to move fast but in a managed and orderly way. Here’s where the real challenge lies. To illustrate the challenge it is useful to break the investment market down into three categories:
- “The blind”. These investors take no account of climate risk in managing their portfolios and will only shift capital when there are clear, explicit incentives imposed on them by government. It is difficult to say how large this part of the market is but if the recent Benchmark Report of the Responsible Investment Association of Australia is any guide, 50% of Australian Institutional Investors actively take account of Environmental, Social and Governance issues in some way. So this potentially means that 50% don’t. That’s a large part of the market that is exposed to a potential shock when change occurs and a large part of the market to be a drag on the shift that’s required.
- “The risk managers”. These investors are aware of the risks of climate change and are actively managing their portfolios to take account of that risk. They are doing this to varying degrees and in varying ways including progressively tilting their portfolios to low carbon assets and encouraging the companies in which they invest to evolve their business models to lessen their exposure to climate change. This group will possibly be influenced by the Agreement to take more aggressive action as they incorporate a higher degree of certainty that political action will occur into their assumptions but any change to their actions are likely still largely to be subject to future domestic policy settings.
- “The future managers”. These investors are fast forwarding and actively managing their portfolios in a way that it should be managed in a 2-D world either through exclusions or explicitly committing to de-carbonise their portfolios. They are not waiting to assess the political risk but just getting on with it. Australian Ethical falls into this latter camp in that we have excluded fossil fuels AND committed to decarbonise the rest of our portfolio by 2050.
To make the rapid shift, the markets need to move rapidly from to 1 through to 3. At the Paris conference there were a number of significant pledges and commitments made by the investment community and evidence that capital is flowing in the right direction including:
- The Montreal Pledge – investors representing $10 trillion in funds under management have committed to disclose their carbon footprint;
- The Portfolio Disclosure Coalition – investors representing $600bn have committed to not only disclose but to reduce their exposure in line with staying within the level of warming;
- RE100 – a coalition of investors have called on some of the largest companies to commit to sourcing their energy 100% from renewable sources;
- Green bonds – there was $37bn of issuance in Green Bonds in 2014 with estimates that it could be $1trillion of flows by 2020.
But there were also serious disconnects. At one session on carbon disclosure, comment was made that an imposition of emissions reduction targets directly on companies was out of the question because it posed problems with Director duties. It struck me as odd that here we have a conference with 45,000 delegates from 198 countries including world leaders trying to work out a way to save the planet from extinction and they don’t feel they are in a position to change the laws of directors duties to accommodate a solution? Until we move past the point where we realise that that kind of thinking is obscene then we haven’t really solved the issue.
So are we there yet? Not by a long shot. But we are far further down the road than we were two weeks ago. It is now up to all of us to take responsibility for our own behaviours, to keep the pressure on our domestic governments to adjust our own domestic policies to be consistent with what are now global, legal obligations. But the best solution is to simply align our behaviours – in particular our day-to-day financial and purchasing decisions – with a 1.5-degree world.
The optimist in me supports Ban Ki Moon’s words from his closing address, “What was once unthinkable is now unstoppable”.