UN Climate Strategists Have A Powerful New Ally: Money

PARIS—There’s a hopeful new sense of inevitability in these climate talks—offsetting the frightening inevitability of climate change itself—the inevitability of a worldwide human response to it.
In Paris this week it seems inevitable that positive change is about to occur, that humanity is on the cusp of tremendous, disruptive change, as if we have just grown wings and are about to leap from the branch. Here, in the words of Al Gore, is why:
“The business community—investors, technology developers, researchers and others—have brought the technologies of solar voltaics and wind power and efficiency and battery storage and sustainable forests and sustainable agriculture to the point where these new approaches are extremely competitive with the legacy approaches we are quite used to.”
And the business community has a new prominence in the summit as well. Institutional investors and fund managers are collaborating with strategists here to reform the world's financial markets to protect them from the “stranded assets” of fossil fuels.
"If we don’t get companies to change, a lot of value is going to be destroyed," said Anthony Hobley, CEO of Carbon Tracker, a financial think tank that analyzes the impact of climate change on capital markets and investment.
The risk to companies and investors is dire, Hobley said, not just from stranded assets but also from disruptive competition. Think Kodak. Think Blockbuster. Think Alco, Baldwin, and Lima—the leading manufacturers of steam locomotives.
Disruptive innovation has energized the Paris Climate Conference, but disruptive innovation has also presented negotiators with a difficult problem—how to steer the world to a low-carbon future without bursting an estimated $6 trillion fossil-fuels bubble.
Accordingly, big capital has emerged here not only as a target for reform, but also as a driver of change and an adviser on strategy.
"We finally understood that business is not just about the companies, it’s about the financial markets and the people who own and control those companies," Hobley said. "How do you engage those financial markets in order to change those companies so they can be a part of our future, a productive part of our future and not part of the problem, and being a part of the problem destroy a huge amount of value that’s tied up in all of our pensions and all of our investments?"
Institutional investors and fund managers have broad clout to reform companies, financial leaders agreed at a panel Hobley hosted here today, as long as they recognize that responsibility.
"I don’t see how you can take a 30-year horizon without taking the environment into account," said Saker Nusseibeh, CEO of Hermes Fund Managers, a London firm that manages $41.5 billion in investments. "It just is impossible. You’re not doing your job."
Fund managers have to consider climate change a long-term risk, Nusseibeh said. Or more accurately, a category of long-term risks. Those risks include stranded assets tied to fossil fuels. The American coal industry may be an early indicator of the fate of industries and thousands of companies that depend on fossil fuels.
"And boy is there credit risk around coal," Hobley said. A Carbon Tracker study found that the coal industry lost 80-90 percent of its share value in five years.
"Twenty-six major U.S. coal companies have gone into Chapter 11. If that’s not financial meltdown within a particular sector, I don’t know what is."
Yet many pension consultants, who manage the retirement savings of millions of people, seem oblivious to the risks.
"If there’s a market implosion it’s not just the institution’s fault, it’s the pension’s fault," said Jack Ehnes, CEO of CalSTRS, which manages the pensions of 880,000 California educators, worth $200 billion.
“If we’re wrong in the assumptions we make in managing this money, or if there’s extraordinary volatility in the markets, the revenue implications are severe," Ehnes said. "Climate change speaks loudly to that issue, because you’re dealing with such a long-term risk.”
CalSTRS invests most of its money in long-term, index-heavy portfolios that have traditionally been stable.
"That really means we’re going to be with these companies near perpetuity," Ehnes said. "So for us to make a difference it means getting these boards to focus their strategies to address these long-term risks.”
Ensuring what Ehnes calls "climate-competent boards" sometimes means ousting fossil board members.
“We really think differently about expertise and the kinds of people who are on these boards, particularly in the most carbon-intensive industries. Most of those board members come from those same backgrounds, those same orientations that are reinforcing those same strategies.”
The institutional investors who realize these risks should also realize their clout, panelists agreed. According to the International Trade Union Confederation, $30 trillion in capital rightly belongs to workers.
"We’ve kind of had enough and we’re saying it’s really simple: we are the asset owners, our members are the asset owners, we don’t like what asset managers have done traditionally over the last 20 or 30 years by simply following the leader," said ITUC General Secretary Sharan Burrow.
Investors can divest, and they may have to, Burrow said, but that shouldn't be the first step because it's not good for the economy.
Instead she suggested subjecting companies to a "2º stress test" — forecasting the impacts on their businesses if the global temperature rises 2º C and insisting they have a plan.
"What’s your plan for decarbonization and jobs? What’s your time frame? And we will stay the distance with you only if you in fact are serious about it, and you can show us results here."
The French energy company Total claims to have such a plan.
Total executives believe renewables will grow fast—"It’s clear they will grow very fast," said Total Vice President Gérard Moutet—and that the relative value of oil and gas will decrease but not disappear for the foreseeable future. They also believe a carbon price is inevitable.
"We believe strongly that emission of CO2 will have a cost, and it must have a cost," Moutet said.
So the company's strategy has been to factor a carbon price—€25 per ton of CO2 ($27.40)—into business decisions as if the price exists today.
"We put it in because we are sure that in the future there will be some cost of emission and so we have to be sure this investment will exist in this environment," Moutet said.
The company has shifted assets from coal to natural gas because of the lighter carbon profile of gas and has invested heavily in solar energy, including a 60 percent stake in the U.S. company Sunpower.
And Total openly advocates a carbon price, Moutet said, because it will accelerate the transformation necessary in the energy industry.
"We really think that when we have a strong price, a realistic price on the emissions you put in the atmosphere, when the CO2 emissions will not be free anymore, you will drastically change the shape of the industry and you will move the industry and you will move much faster to go to a low-emission economy."
Read More: Al Gore To Investors: Invest In Renewables Or Risk Stranded Assets