In 2007, when the Intergovernmental Panel on Climate Change published its last reports detailing the causes and effects of climate change, the topic was on everyone’s lips, boosted by the success of Al Gore’s film An Inconvenient Truth and the recent publication of the UK government’s Stern Report.
But the issue slipped from the headlines after disastrous 2009 UN climate talks in Copenhagen failed to deliver on expectations, and the financial crisis and Arab spring took centre stage.
Progress was blocked because the world’s second-biggest emitter of the greenhouse gases that cause climate change, the US, refused to commit to cutting emissions unless the biggest emitter, China, also did so. However, China and other developing countries said it was the responsibility of the industrialised world to cut emissions and allow emerging markets to develop.
This impasse allowed asset owners and the investment industry to lessen their focus on the issue, and to continue valuing fossil fuel companies on a “business as usual” basis.
However, as the IPCC prepares to release its next set of reports, starting in September, the impact of man-made greenhouse gas emissions is edging back up the agenda. It has been helped by a number of recent extreme weather events, such as last year’s drought in the US Midwest, huge floods in Pakistan and severe winters in Europe. Furthermore, there are signs that the deadlock in global policy talks may be easing.
President Barack Obama recently announced plans to limit emissions from power plants, to stop financing coal-fired power stations abroad and ensure that the US “uses less dirty energy, uses more clean energy and wastes less energy throughout our economy”.
Meanwhile, commentators in China have started to hint that the country may accept binding international targets on its emissions, although analysts warn that this is by no means certain.
As governments start to grasp the implications of runaway climate change, there are signs of real change in the actions countries are taking domestically, says Bob Ward, policy and communications director at the Grantham Research Institute on climate change and the environment at the London School of Economics.
“China is moving in the right direction and it is clear that in the US Obama would like to do more. All around the world, countries have been acting through domestic measures to move to a low-carbon economy,” he adds.
This is partly because the consequences of exceeding average temperature rises of 2C – the benchmark for the UN’s climate talks – are becoming clearer.
“The IPCC reports [one on climate science, one on impacts, adaptation and vulnerability and one on how to mitigate climate change] will remind people of what is at stake and spell out very clearly the consequences of a rise of more than 2C,” says Mr Ward.
“The impacts of climate change have been happening even faster than anticipated – the extent of Arctic sea ice last summer was about half the level in the 1980s, for example, which is an unexpectedly quick change.”
Climate change will also cause more extreme and more frequent droughts, floods and heatwaves, higher sea levels, lower crop yields, lower water availability and increased desertification.
There is a much clearer sense, both in the scientific community and popularly, that climate impacts are going to be more serious than previously thought, says Nick Robins, head of the climate change centre at HSBC. “Political and public opinion has clearly been shifting, which gave Obama the political space to make his recent speech,” he says.
This is not just an industrialised-world phenomenon. “Governments in Asia have also begun to shift, driven largely by the very apparent environmental crises and degradation, and the horrifying impacts on Asia’s population,” says Jessica Robinson, chief executive of the Association for Sustainable and Responsible Investment in Asia.
This shift has significant implications for investors, according to Chris Davis, director of investment programmes at Ceres, a US-based sustainable investment coalition. “We are seeing a sea-change in the investor landscape, not least because we are starting to see an alignment of interests on climate between China and the US, which will be crucial for a global agreement in 2015.”
Governments attending last year’s climate talks in Doha agreed to sign a global agreement that binds all economies to cut emissions by that date. If it happens, says Mr Ward, “a global emissions path will be defined that will effectively create a global carbon budget”.
Analysis by the International Energy Agency and others suggests that to meet the 2C limit, two-thirds of current fossil fuel reserves “are unburnable and a lot of companies are sitting on assets that are not worth as much as the market says they are now”, he continues.
With the world’s asset owners estimated to have 50-60 per cent of their portfolios invested in high-carbon assets, (defined as oil and gas producers, miners, utilities, the banks that finance this activity and the manufacturers that rely on its output) investors may need to re-evaluate the value of their holdings in fossil fuel companies if that target becomes codified in international law. If they all decide to sell at the same time, it could lead to a very nasty market event, Mr Ward warns.
Investors need to change the way they think and behave, argues Mr Robins. “The primary duty of investors is to build capital discipline. They need to think about how their capital stewardship will generate good long-term returns in a carbon-constrained world.”
At the same time, tackling climate change provides a fantastic opportunity, Mr Davis says. But “the market really lacks the capacity to channel the hundreds of billions of dollars of institutional money that are needed into low-carbon investments right now,” he adds.
“The market has to offer alternatives that are pretty much substitutable,” says James Cameron, chairman of Climate Change Capital, a London-based investment manager. Bodies such as the Climate Bonds Initiative are working on this, but progress is slow.
One quick way to create alternative investment opportunities in the US would be to make master limited partnerships available to renewable energy and energy efficiency projects as well as to oil and gas infrastructure, argues Mr Davis.
Ms Robinson says that “in China, the shadow banking issue illustrates that there is massive demand for attractive products for retail investors that are relevant to China’s growth. In response to this issue, who is going to provide the green investment products for these retail investors?”
She also highlighted the urgent need for “stable, consistent and long-term government policies and incentives that would have a positive impact on investment flows and lead to better resource allocation – for example, away from subsidies that favour fossil fuels in place of renewables”.
Mr Robins says that creating a low-carbon economy is about more than just climate change.
“In the run-up to Copenhagen, the view was that we needed to take action to deal with the long-term risks. That is an argument that is hard for people to understand.
“Low carbon also means more innovation, lower healthcare costs because there is less air pollution, and less water stress because renewable energy uses less water than fossil fuel plants, while energy efficiency reduces the need for capital expenditure on new power stations. These things have very attractive macro implications.”