Our new associate Kajetan Czyz Analyst, Governance and Sustainable Investment at BMO, explains why Paris has galvanised investors and highlights the changes in low carbon finance expected in 2016.
In the run-up to the Paris talks, investors participated in discussions with policymakers. Their key asks? To give the investment community a clear direction of travel including a long-term target, supported by country-level plans. Here are 5 reasons investors can feel good.
The Paris Agreement meets all key investor expectations, and crucially during 2016 global regulators will focus on the elephant in the room—the financial sector’s role in addressing climate change.
1. Long-term goal
The Agreement sets an ambition to achieve “a balance between sources and sinks of greenhouse gases in the second half of this century” while “peaking emissions as soon as possible.” In other words the world should become carbon-neutral.
2. National commitments
Every participating country is obliged to produce a national emissions reduction plan (“Nationally Determined Contributions” or NDCs). All but six countries have already done so.
3. Review mechanism
NDCs will be reviewed in 2018 and then every five years to ensure they are in line with the Agreement’s aim to hold the global temperature rise to “well below 2°C” and “pursue efforts to limit the temperature increase to 1.5°C.” A key clause states that the NDCs cannot be weakened.
The Agreement has introduced a monitoring and verification requirement for all countries, and a global stocktaking of reduction efforts in 2023. This increases the certainty that measures are being implemented, and serves as peer pressure through “naming-and-shaming” laggards.
Developed countries have now agreed to fully fund the Green Climate Fund up to $100 billion per year from a “variety of sources,” which includes private finance.
The UN Climate Summit in Paris gives investors greater clarity than ever before about the political willingness to transition the global energy system to a post-fossil fuel future. This will have a profound impact on energy producers and users alike. It also has implications for fund management and strategic asset allocation decisions.
So what exactly is next for investors? Some countries, most notably France, have set in place a requirement for investors to assess the impact of their investments and analyse their carbon risk exposure. More countries are expected to follow suit, and prudent investors have already began work in this area, e.g. AXA.
Expect 2016 to see scaling up by financial regulators on climate change. The Paris Agreement commits governments to “making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” And as implementation gets underway, investors will be expected to take action to support this.
Four developments investors are watching:
- Sweden is the first country to announce a review obliging its financial regulator to ensure the financial system is “financing sustainable development.”
- France’s new Energy Transition Law requires institutional investors to provide the carbon footprints of their investments, review their portfolio’s alignment with a low-carbon development pathway, and to disclose methods of integrating climate-related risks. Guidance on implementation has recently been finalised.
- In the UK, Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board (FSB) announced an industry-led Task Force on Climate-related Financial Disclosures (TCFD) to be chaired by Michael Bloomberg.
- The Chinese G20 presidency is set to make “Green Finance” a priority area for 2016, with the Paris deal on climate change—and the energy transition—a mainstream investor issue.
The direction of travel couldn’t be clearer.