Investors say it’s time to act

Business Spectator
Wednesday 17/11/2010 Page: 1

It seems the world's leading investors are sick of not being listened to on the critical issue of climate change, and financing the transition to low-carbon technologies. And they've decided to do something about it. A group of 258 investors with $US15 trillion under management - or about one quarter of the globe's market capitalisation - have declared that they stand ready to invest in new technology and have implored governments to give them the mechanisms to do so.

They say that if governments are serious about their pledge to cap average global warming to a maximum of 2°C, then it is time to act and provide the investment climate that would unlock the trillions of dollars needed to achieve this. Chief among these, of course, is a carbon price strong enough to encourage that investment, as well a range of complementary measures to encourage investment in renewables and energy efficiency. It echoes similar comments in recent weeks by many of the world's largest industrial companies.

It's estimated that around $US500 billion a year is needed to help meet the 2°C target over the next decade, but the investment in 2009 reached little more than a third of that total, and in 2010 will barely scrape above $US200 billion - a big number but still $US300 billion short. Worse, the investors say, the world faces climate-related GDP losses of up to 20% by 2050 and severe risks to individual assets, and they want to protect their investment.

"Climate change may be out of vogue in Washington today, but it poses serious financial risks that are not going away and will only increase the longer we delay enacting sensible policies to transition to a low-carbon economy", said Jack Ehnes, the CEO of the California State Teachers' Retirement System, the second largest public pension fund in the US with $US141 billion in assets. The group includes 33 investors that come under the Australian-based Investor Group on Climate Change, including AMP, AXA, Colonial and BT, which has called for Australia to implement a carbon price.

The statement highlights the fact that, while more was invested in renewable technologies on a global scale than in fossil fuel technologies in the past year, Australia anticipates little more than $2 billion a year to be invested in renewables over the next decade, while an estimated $50 billion will go to supporting and expanding existing infrastructure in the next five years alone. "Investment flows to countries with regulatory certainty and strong returns. It's as simple as that", said Frank Pegan, the chair of the IGCC and CEO of Catholic Super. "Australia should implement a carbon price as soon as possible to attract investment and avoid being last in the low-carbon race".

The group's statement is clear about what's at stake: "Investors are concerned with the risks presented by climate change to regional and global economies and to individual assets. At the same time, investors are interested in the large potential economic opportunities that the transition to a low-carbon economy presents. "Investors have a fiduciary responsibility that requires them to seek optimal, risk-adjusted returns on their investments. At present, in the absence of strong and stable policy frameworks, many low-carbon investment opportunities do not currently pass this test".

So they suggest that domestic policies include not just a carbon price (through a well designed carbon market) but frameworks to deliver renewable energy, energy efficiency and other low-carbon infrastructure - in short, the sort of complementary measures that have become a political football in Australia these past few week.

More specifically, the group recommends short, mid and long-term greenhouse gas reduction targets, policies to accelerate the deployment of energy efficiency, renewables, green buildings, clean vehicles and low carbon transport infrastructure, and the phasing out of fossil fuel subsidies - which the G20 has agreed to do but, like the Copenhagen Accord which sets the 2°C target, have yet to decide how to do it.

They also want strong action in the international arena, including defining of the mechanisms for the $100 billion a year to support mitigation and adaptation in the poorest countries, a rapid timeframe for a scheme to protect forests through the REDD mechanism, clarity on the future of international carbon markets such as the UN's Clean Development Mechanism, robust agreements on measurement, reporting and verification, and finally a clear commitment from Cancun to seal a binding international treaty in South Africa in 2011.

It notes that countries that have had strong policies that provide long-term certainty and enable credible mid-to long-term risk assessment have already managed to attract significant capital in low-carbon investment policies. But in other countries, frameworks have remained weak and uncertain (that could be Australia) or have been damaged by indication that strong policies will be retroactively scaled back in the face of the economic downturn (sounds like Spain).

Pegan notes that Australia should not be using the US deadlock as an excuse not to act, but should be paying more regard to the actions of its principle trading partners in Asia, where governments have been proactive and large industrial groups are retooling their businesses. Pegan says this gives a clearer picture of the future of climate change and energy investment trends.

This article first appeared on Climate Spectator on November 17.