Brussels/London: The European Climate Foundation (ECF), a leading philanthropic organisation with the aim of promoting the transition to a low-carbon economy, is pleased to announce the appointment of Sharon Turner as its new Executive Director for Governance and Law.
An expert in environmental law and governance and a qualified Barrister, Sharon Turner was Director of the Climate & Energy Programme at environmental law organisation ClientEarth in London before joining the ECF.
Sharon Turner was previously Professor of Environmental Law at Queen’s University Belfast, where she worked for 25 years. During this time, she was seconded to the Department of the Environment in Northern Ireland, where Sharon Turner acted as the Department’s senior legal advisor on the environment for two years. She is Visiting Professor at University College London and the University of Sussex.
In her new role at the ECF, Sharon Turner will lead the organisation’s work on energy and climate governance and law. An immediate focus will be the ongoing efforts to help define a transparent and feasible governance system for the Energy Union in order to ensure proper implementation of the EU’s domestic and international obligations for climate and energy.
Johannes Meier, CEO of the ECF, said: “Europe’s Energy Union can only be successful if its legal framework provides a clear and realistic pathway towards a single, low-carbon EU energy market. Due to her extensive experience both as a private sector and government legal consultant and as an outstanding academic in the field, Sharon Turner is perfectly positioned to drive the ECF’s work on governance. We are delighted to welcome Sharon to the Executive Management Team and look forward to working with her.”
The Chair of the ECF Supervisory Board speaks at the Conference on Sustainable Innovation – Towards the UN Convention on Climate Change
The governments of Israel and Germany held a conference on sustainable development and innovation in Tel Aviv, Israel on 14 July. Caio Koch-Weser, Chair of the ECF Supervisory Board, was invited to address the conference in his capacity as a member of the Global Commission on the Economy and Climate.
The Commission’s New Climate Economy (NCE) Report “Better Growth, Better Climate” was launched last year and the paradigm of the report has met with a highly positive reception. Evidence shows that decarbonisation and economic growth can go hand in hand. Thus, the report’s findings moved climate protection from cost to opportunity, and they have since begun to influence the global agenda.
The Commission’s second report “Seizing the Opportunity: Partnerships for Better Growth and a Better Climate” released on 7 July identifies a number of major trends offering new opportunities to accelerate this transition. Mr Koch-Weser first outlined the key NCE messages; second turned to promising, emerging trends showing alignment of objectives is possible; and, third, proposed a collective action agenda, which can steer the process towards a sustainable future.
Study shows climate levy can significantly reduce CO2-emissions in the power sector by 2020
The so called “climate levy” proposed by the German Federal Ministry for Economic Affairs and Energy can significantly reduce CO2-emissions in the German power sector by 2020 and thus help meet the national 40 per cent climate target, says a new study by the German Institute for Economic Research (DIW Berlin), which was commissioned by the ECF and the Heinrich Böll Foundation. The report says that compared to other options, which are currently being discussed, the climate levy is the most cost-effective and efficient option and offers opportunities for the structural transition and for employment.
Please download the study here (German version only).
The European Climate Foundation is pleased to announce the launch of Industrial Innovation for Competitiveness (i24c), a new initiative aimed at strengthening Europe’s industrial leadership in the new world economy, and headed by Dr Martin Porter, Executive Director i24c and a member of the ECF Executive Management Team.
As the global economy decarbonises rapidly and is transformed by technological, social and ecological mega-trends, Europe needs to adopt a more systemic and innovation-focused industrial policy to reap the benefits of this transition.
i24c will bring together economic policy-makers, new and established industrial entrepreneurs, cities and academic institutions with the aim of creating a new European industrial compact, a joint vision for a competitive European industry as well as the evidence-base and innovation pathways to achieve the transition to the new economy.
Johannes Meier, CEO of the European Climate Foundation, stresses that “only through a systemic approach to innovation in its industry will Europe be able to reap the benefits from the transition to a low-carbon economy. i24c’s work will help end the sterile debate between competitiveness and climate action which has been preventing real progress in transforming Europe’s industrial base and prosperity”.
The work of i24c will be guided by a High Level Group of respected policy-makers and industrialists such as former European Commissioner for Research, Innovation and Science, Maire Geoghegan-Quinn, former Director-General of the World Trade Organisation Pascal Lamy, Gary McGann, CEO of Smurfit-Kappa, Beata Stelmach, CEO Poland and the Baltics, GE and Mikko Kosonen, CEO of Sitra.
Chris Barrett contributes to the OECD Forum IdeaFactory “Climate, Carbon, COP21 and Beyond” on 2 June 2015.
His contribution is available online via OECD Insights and below.
The ECF was established in 2008 as a major philanthropic initiative to promote climate and energy policies to cut Europe’s greenhouse gas emissions and to help Europe play an even stronger international leadership role to mitigate climate change. I run our finance sector policy program, and would like to give you an idea of how I see that work and its role in delivering climate mitigation.
We’re all shaped by context and in my case that context is more than a decade working on various versions of what would become Australia’s carbon tax in 2012. My colleagues like to tease me that once the Australian carbon tax was abolished in 2014 my “theory of change, changed” and there’s something to that.
But you don’t need a political mugging in a dark alley to understand that we’re asking a great deal of today’s governments to mandate the emissions cuts science tells us we need. The politics are always devilishly hard when the avoided damage appears (and I emphasise “appears”) to be far off in the future, and the costs of action appear (emphasis again) large and immediate.
That’s not to say we shouldn’t demand a strong deal in Paris – we absolutely should and must, and I recommend my World Resources Institute colleague Jennifer Morgan’s recent work as a great primer on the contours of a powerful and effective Paris deal.
But successful political action never occurs in a vacuum and we’re better to understand a “threshold logic” at work in which a great many forces (political pressure, observable climate phenomena, changing personal and corporate behavior) build up momentum and facts on the ground which can then crystallise in a new policy consensus.
We typically think of these things as happening very slowly, but only because our habits of thinking don’t cope well with transitions where an unsustainable state exists for a long time before suddenly it ceases being sustained. What we need are analogies – never perfect in themselves – to demonstrate a long run-up and sudden resolution in the past to give us scenarios for how our current climate collective action problem may cross a critical threshold.
I think there are two powerful analogies from the world of finance, each of which underpins a crucial message about the low-carbon transition.
Message one: the carbon bubble is real
Consider a banker in 2006 holding a portfolio of credit default swaps based on US sub-prime mortgages. That US housing values were unsustainable has now entered the canon of global economic history, but it’s worth reflecting on the investor assumptions that held sway in the years approaching the crisis: investors assumed the underlying investment was sound, that any defaults would be distant in time or isolated in number or both and perhaps most importantly, that even if the trend of increasing home lending in debt was unsustainable, any unwinding would be slow and orderly, or slow enough for that particular investor to sell before the crash.
Of course you know where I’m going with this. The carbon bubble popularised by Bill McKibben, Carbon Tracker and others argues powerfully that holders of carbon-intensive assets are soothing themselves with the same false assumptions: asset values are safe, carbon regulations that might devalue them are in the distant future, and any decarbonisation path will at worst be slow or gradual and well-telegraphed for the astute investor which of course includes them.
But unquestionably, this view is even more deluded than for our sub-prime investor in 2006. The analysis is there for anyone who cares to look – fully 80% of proven carbon reserves – sitting on the balance sheets of companies around the world – are unburnable if the world is to maintain the 2° warming scenario to which governments committed already in Copenhagen.
There is a ready-made explanation for this of course, namely that investors do not believe governments are serious about the 2° target and they will never feel the value-destroying regulations they are supposed to fear. As a piece of political analysis, this would worry me deeply if I were one of those investors, and for four reasons:
One, those regulations exist already, and the trend is towards their increase, even before Paris commitments are finalized – the EU Large Combustion Plant Directive, the US Clean Air Act, and even the recent proposed coal levy in Germany are all examples;
Two, regulations don’t need to target carbon to destroy the value of carbon-intensive assets. The biggest climate story of the year so far – the nearly 5% year-on-year fall in Chinese coal consumption – has been driven to a very large extent by air pollution concerns.
Three, there is economic stranding of assets too, as I hardly need to explain given recent plunges in fossil fuel commodity prices.
Four, the political heat is being turned up on a critical component of high-carbon asset values, namely the implicit and explicit subsidies on which they depend. Explicit subsidies are falling as government budgets come under more pressure and the lower oil price makes reform less politically painful. And implicit subsidies have just had a spotlight shone on them by one of the best pieces of public good economic research I have seen in recent years – the IMF quantifying them at the lion’s share of an astonishing $10 million a minute.
…and all of this is before we consider the gathering impact of divestment campaigns around the world, which have the ultimate aim of removing what I would call the “social licence to operate in capital markets” for fossil fuel companies. Just last week, we saw arguably the most spectacular and consequential example of this, namely the divestment decision by Norway’s giant sovereign wealth fund.
And then let me add a further reason to worry about a carbon bubble, and I proceed from another analogy:
Message two: low carbon economics are transformational
Consider you are a stockholder in Kodak in the mid-1990s and again let’s look at the underlying assumptions for why your investment is safe. People need your film to record their memories, it’s an inexpensive product, it’s ubiquitous, and your market position is strong. You’re thoroughly unprepared for a competitor – a digital camera – with a marginal cost of zero.
You see where I’m going here too. Solar PV, just to cite the most obvious example – dematerialises energy the same way as digital photography dematerialised photography. I didn’t name or compile this next chart, but it makes in very dramatic fashion a point my colleagues at Agora Energiewende in Berlin recently devoted a long and fascinating analysis to: solar outcompeting conventional new coal and gas fired plants by 2025.
And it is not just solar, of course, as recent announcements by Tesla of its move into home batteries have focused investors on the Moore’s Law cost trajectory of battery storage.
Nor is Kodak an isolated example. We have seen this again and again in recent decades with technology disruptions: floppy disks, video stores, CDs. Capitalism forces radical sectoral change all the time.
Reflections on the psychology of climate action
I started with personal stories, so let me finish with one. When we introduced the Australian carbon tax, our Treasury did some modeling to work out what the impacts on emissions and inflation might be. The impacts were extremely low – effectively a one-off increase in inflation of less than one percent, but the lived experience of the tax beat even that. When the tax was introduced, we saw emissions fall more than expected with a lower inflation impact than expected. As a practical matter, it always surprised me as an economist that we would spend decades in Australia pushing for a lightly regulated, flexible market economy and then freak out at the idea of the cost of one byproduct of production going up a bit in price.
This is just one example of my final message, which is that the costs of the low-carbon transition are routinely overestimated. Let me depart from economics and dabble for a moment in psychology. When we all (rightly) insist that climate change is an urgent and existential challenge, people almost automatically conclude the solutions must be painful and expensive. There’s no solution to this other than to be aware of it, and to be very disciplined about how we model and communicate the costs of action and repeat, repeat, repeat.
To re-cap, there are two powerful forces at work driving a low-carbon transition: a bubble building up in carbon-intensive assets, and transformative economics of many low-carbon investments. We have seen similar forces tip over into dramatic action in the past. And we needn’t fear the transition, since the costs will be lower than we expect.
What this all means for Paris is that the transition is coming, the question is how orderly it will be. In this context, the role for governments is clear – transitions are fairer, smoother and more durable when they are policy-led or at the very least, policy-enabled. And the clearer these underlying economic trends are to all players, the easier it will be for governments to act. Actually, a Paris deal has the chance to accelerate the transition and ensure a more orderly transition by sending clear signals reaffirming the messages that are flowing already. This is why we at ECF have a finance program, and why I’m delighted to be part of it.
Analysis by the Coalition for Energy Savings reveals that central governments have not shown leadership in ending the waste of energy in their own buildings.
Brussels, 21 May 2015 – New analysis by the Coalition for Energy Savings of national reports on the implementation of the Energy Efficiency Directive (EED) reveals that central governments have not shown leadership in ending the waste of energy in their own buildings.
The report analyses the plans and inventories that Member States notified to the European Commission in order to comply with Article 5 of the EED, which requires them to annually renovate 3% of the floor area of central government buildings or put in place alternative measures to reach at least the same energy savings.
Eleven Member States chose the default approach, while 17 Member States selected the alternative approach which allows them to opt for non-renovation measures, such as behavioural change campaigns. Out of the 11 Member States that have chosen the default procedure, only Latvia and Slovenia have provided good quality inventories, which are the first essential step to plan and start the renovations. Overall, Member States have provided limited information, and no clear plans on the renovations to be undertaken to achieve the required energy savings.
This is the third report in which the Coalition for Energy Savings monitors implementation of the EED with recommendations for Member States and the EU.
The Chairman of the ECF Supervisory Board gives a dinner speech on Climate Finance in Berlin on 22 April 2015.
The dinner speech is available online via the website of the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety and further below.
– Check against delivery –
I will take the private sector perspective and – as Chairman of the Board – the perspective of the European Climate Foundation, which is advocating cross-sectoral collaboration and transformational change.
2015 will be a critical year and the G7 summit a highly important step on the road to Paris.
We are familiar with the challenge:
We all know that continuing on a business-as-usual pathway for CO2 emissions will incur extremely risky and irreversible changes to the world’s social and natural systems.
We are likely to see an international climate process delivering a complex outcome due to diverse national contributions. I am optimistic as far as possibilities are concerned but I remain sceptical on the probabilities of a truly satisfactory outcome.
The complexity of the international climate process is symbolic in character: Will, objectives and capacities differ – whether we look at the international climate process, at national debates, at public vs. private sectors. We certainly should come to the conclusion that it is necessary to think in terms of synergies.
Among other things, we are aiming for economic growth, security of energy supply and climate protection. These three goals could be visualised as being bound to each other via a triangular relationship. They are interdependent. Sustainable social and economic wellbeing will not work unless we strive towards all three of them.
This is indeed what the Global Commission on the Economy and Climate emphasises, on which I gladly serve as a member. I am pleased to see that the paradigm of the New Climate Economy Report “Better Growth, Better Climate” has met with a highly positive reception.
In a similar vein, a High-Level-Group involving a number of influential CEOs from various industry sectors and public sector officials was set up by the European Climate Foundation this spring to develop and further European industrial innovation and competitiveness in line with the “2030 package” of a sustainable future. This forum will be looking for a new approach to European industrial policy, rooted in a wider jobs and growth agenda to win competitive advantage from the transition to a new economy.
There is potential for a paradigm shift. These are good news.
As a matter of fact, certain countries and regions are becoming increasingly ambitious. For example, the work on financial reform in China may lead to policies for a green economy and green financial sector being introduced into the next Five Year Plan and placed on the agenda for the next G20. Similarly, the new AIIB could end up leap-frogging the West if it were to have sustainability and low-carbon as a core focus, as is being contemplated.
California Governor Brown’s announcement of 2030 goals for renewables, energy efficiency and reducing fossil fuel consumption in transport is a very commendable continuation of impressive Californian leadership over many decades, showing that growth and emissions can be de-linked. Ontario’s decision to start a carbon market and link to Quebec and California is a significant step, potentially creating a third major carbon market to match China and Europe.
The technology cost of renewable energy is rapidly coming down; a similarly dynamic scenario is emerging as far as climate finance is concerned. Globally, countries are looking to Germany and the EU for best practice, innovative technology and instruments. Germany, as the host of the G7 summit, is at the forefront of the low-carbon transition. Without doubt, we should not make the usual mistake of overestimating the speed of transformational change in the short-term, and underestimating the speed of change in the longer term. We carry responsibility to drive, advocate and channel this transition.
Therefore, the guiding question is not if but how to manage the low-carbon transition.
The G7 has a distinguished history of leadership such as the process that led to the creation of the Financial Stability Board and of the G20. I will suggest some ideas for how you, working with your finance colleagues, could apply this leadership to financing the low-carbon transition.
First, the Problem
Economies today are failing to mobilise sufficient public and private finance for low-carbon investments. This is not due to a shortage of capital in the global economy. It results, in most countries, from a lack of public financing capacity for green infrastructure that efficiently shares risk with private investors, and financial structures that allocate capital inefficiently, with risk, reward and geographic preferences that do not match well with an effective low-carbon transition.
Relative to the transition we need, low-carbon investment levels are too low:
Clean energy investment in 2014 did hit a new high of $310 after 2 years of declines.
However, IEA suggests $1.1 trillion/year is needed in the low-carbon energy sector alone.
And high carbon investment levels are too high:
IEA highlights that $950bn were invested in oil, gas and coal in 2013 – and hence doubled in real terms since 2000.
Although the ratio of fossil fuel to clean energy investment has improved, still ~3x more investment flows into high carbon sources of energy.
No doubt, scaling has to come from private investment and capital flows. A general transition to a low-carbon society is conditional upon a shift to low-carbon finance and “climate-robust” investment portfolios. This, in turn, is fundamentally linked to two important challenges I would like to emphasise:
How to change private sector risk perception: I will highlight intensity and type of perceived and actual risks associated with high and low-carbon investment; and underline the relevance of risk assessments, risk management and predictability of political direction.
How to support action flowing from changing risk perception: Investments undertaken in the coming years determine future pathways. I will outline innovative financing instruments and criteria guiding investment decisions at the micro and macro level.
Investment is fundamentally a question of risk perception. Investors have long memories around retro-active policy changes. Governments have to do a much better job of providing policy Transparency, Longevity and Certainty (TLC).
Deutsche Bank analysis suggests unsubsidized technologies like solar are already below retail price of electricity in as many as 30 markets. This helps the risk/reward calculation. However some technologies will still require some government support to accelerate their deployment and cost reductions.
High-carbon investments carry the advantage of the established and mature, with the lobbying power that goes with this. However, tides are shifting as the “carbon bubble” narrative takes hold and renewables become more competitive. Investors such the $840bn sovereign wealth fund Norges and many others are recognising that climate change will undermine their returns and that governments will eventually truly get serious about climate action. One pension fund stated: “There is no place to invest in a 4 degree world”. Many are increasing their engagement with fossil fuel companies, shifting or even fully divesting from coal or all fossil fuels.
We see conventional utility business models faltering in Europe and the US, partially due to rapid growth in distributed generation and energy efficiency. Utility shares have underperformed the general market by ~30-40%. The announcement that one of Europe’s largest utilities, E.ON, would split into a “clean company”, keeping the E.ON name, and a “new company”, bundling fossil fuel and nuclear activities, is pathbreaking. The Swedish utility Vattenfall’s intention to divest its lignite operations is another sign of the shifting tides. This may trigger similar moves elsewhere.
Coal is in the news in Germany and beyond, and largely because it is the most vulnerable to carbon bubble risk. We traditionally think of coal as cheap energy, but only because in so much of the world it has not faced a carbon price. As soon as it does, – and needed is a strong, predictable and rising carbon price – the cost curves flip very quickly indeed. We know in Europe that the shift in ETS price that pushes coal off the merit order curve is not large at all – a price of ~€40/tonne is required. A higher carbon price could drive more emission reductions in an economically more efficient manner. Further EU ETS reform is vital, while keeping the overall burden on consumers roughly neutral.
But carbon prices need not be explicit to have profound effects. The plunge in coal consumption in China of late is not a story about explicit carbon pricing. It is a story about implicit carbon prices – air pollution controls, cutbacks in steel production, and financing directives.
As the direction of travel is becoming clearer, governments and regulators are drawing the necessary consequences also as far as finance is concerned, most obviously the Bank of England’s current work on the risk of carbon bubbles in financial firms. I also welcome the very recent French government’s request to the Financial Stability Board to undertake a wide assessment on climate related risks and opportunities. Finance departments and regulators have an opportunity to expand responsible and sustainable capital markets. This should be a broad effort and include measures to encourage institutional investors in shifting the financial sector and real economy to sustainable and profitable outcomes.
The emerging engagement of stock exchanges is encouraging: twelve major exchanges require some environmental and social reporting for at least some of their companies, while seven of these exchanges are requiring reporting for all listed companies. But driving more action will require action by government and regulators, as I will discuss later.
Thorough carbon and sustainability risk assessments will become commonplace if we move towards comprehensive risk disclosure and measurement, and integrated reporting standards to allow fully informed investment decisions.
The outlook is fundamentally positive. Technologies are maturing and being de-risked. Germany is a good example, where the support frameworks for renewable energy are clearly set from the top, with consistent messages and backed by a credible government. As risk perception changes and returns improve, investment will scale.
The G7 should announce its aim for Paris to agree a regular review cycle every five years benchmarked against a 2050, 100% decarbonisation goal. Alongside a global long-term decarbonisation target that is badly needed to provide clarity on the direction of travel, what are the actions governments and regulators should take? I will group proposals under four categories where governments and regulators should lead in stimulating and scaling private sector finance:
Do no harm,
Leading by example,
Setting the rules, and
Expanding new partnerships and instruments.
First, do no harm:
Let me highlight two priorities:
Export credit agencies and coal: OECD governments have the opportunity to end Export Credit Agency financing for coal – a key part of the larger effort to end public financing for fossil fuels and high carbon projects. First movers include the U.S. Export Import Bank and the European Bank for Reconstruction and Development. The European Investment Bank – the biggest multilateral bank worldwide – has specifically set an initial Emission Performance Standard of 550 g CO2/kWh for fossil fuel power plants, which would (for now) only allow financing of the most advanced coal technology if it partially uses biomass or waste heat. A commitment to phase out high carbon financing is important for the Road to Paris.
Subsidies and other incentives: The New Climate Economy Report underlines that phasing out subsidies and other incentives for fossil fuels, agricultural inputs and urban sprawl are priorities. The G7 should work with the G20 to set a firm four-year timeline to end fossil fuel subsidies and re-direct support to other public priorities including green infrastructure investments, energy access and finance for development. This is, of course, familiar territory and a very tall order. It should be approached as part of an economic reform and growth agenda that increasingly incorporates climate into all core economic decision-making processes. Present lower oil and gas prices are clearly a window for policy makers to reduce distorting subsidies to energy consumers and producers, recycling those funds.
Second, leading by example:
A credible finance package is needed for the Road to Paris and the Financing for Development summit. The G7 background report usefully updates the AGF report, which I was involved in before Cancun, and shows that slowly progress is being made towards the $100bn climate finance target. More importantly, it is shifting the debate to the broader question of mobilising all types of private capital for infrastructure and development goals. The New Climate Economy Report found that meeting city, transport, food and telecommunication investments will require $5 trillion in total over the next 15 years, with some additional investments necessary to meet SDG goals.
2015 is an opportunity to create synergies between climate, development and infrastructure. However, a rigid separation between official aid and climate finance would be deeply damaging. The climate finance and sustainable development finance agendas should not try to create new institutions but focus on cooperation between existing institutions: the aid effectiveness agenda.
Expanding responsible ownership: Governments can help expand the number of investors asking tough Environmental, Social and Governance (ESG) and climate change questions of their fund managers and investee companies by expanding and replicating initiatives like the UK and Japan’s Stewardship Codes. However, the massive shift to passive investment and a focus on low-fees poses a challenge to this.
Public sector pension funds should be doing much more to lead by example: G7 countries would work with your many public pension funds and announce that they will deepen their efforts to shift investment mandates and practices towards responsible investment practices of incorporating carbon as well as ESG factors into investment decision making.
Green Bonds: While Green Bonds have so far not led to ‘additional’ investments, it is the start of tapping the debt capital markets at scale and engaging a broader set of bankers and investors. Governments could do more to support that market. However, excessive focus on green standards risks slowing the market, when there are no requirements for transparency for ‘brown’ bonds. I also challenge you: which country can put out the first OECD green government bond?
Third, setting the rules:
Governments have to intensify efforts and take the leadership for creating enabling policy frameworks.
One of the vital elements is carbon pricing.
Carbon pricing: The New Climate Economy report calls for strong, predictable and rising carbon prices. Governments should use a shadow carbon price and carbon discount rate in their decision-making processes. The slow but steady progress that many countries are making towards carbon pricing is encouraging – and the idea of creating a platform for elevating political discussion of carbon pricing would be helpful. One area for focus is to ensure that countries’ domestic carbon markets use the ‘CDM rulebook’ and restore demand for international credits. Ongoing work on far-reaching EU ETS reform is necessary. Generally, policy certainty on future carbon pricing paths is critical.
Implementation of regulation and standards: There are many regulations on companies’ environmental practices but not many for the financial sector. This needs to change. Sustainability needs to be applied through different types of regulation and standards in several areas of the financial sector: annual reporting by companies and investors, due diligence and risk models, institutional investor contracts with asset managers, how asset managers and investors analyse and work with the companies and real estate they invest in, how investors engage with governments and companies in the bond market and how research analysts and credit rating agencies assess sustainability.
I would like to specifically mention the following key areas:
Integrated Reporting: Better information will result in better companies and better growth. Expanding ESG reporting is a vital mechanism to secure access to investors that increasingly need ESG information in their investment process. Integrated Reporting and ESG data disclosure by companies & pension funds is the raw material for longer-term decision-making. The more established an integrated approach is within a company, the more it will also influence the way the company pursues new investment decisions.
EU member states need to implement the Directive on non-financial disclosure – and make it more rigorous. G7 regulators should require reporting using accounting standards being developed by the Integrated Reporting Council and the US focused Sustainability Accounting Standards Board (SASB).
Fiduciary duty: Reform is necessary to expand responsible investment practices. Fiduciary duty exists to ensure that those who manage other people’s money act in the interests of beneficiaries (i.e. pensioners). 10 years ago a ground-breaking report concluded that “integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions”. A recent UK Law Commission report reinforced these findings.
Now more than 1300 investors with $45 trillion in assets (this is half of the institutional investor market) are signatories to the UN supported Principles for Responsible Investment (PRI). This is significant progress but most investors have yet to fully integrate ESG into their investment process. The PRI will publish a report in September on what is needed to mainstream integration of environmental and social factors in investment decision-making. Governments should support implementation of its recommendations.
Consideration of carbon asset risk in financial institutions: More action is needed to expand consideration of carbon asset risk in financial institutions. It is notable that governments in Brazil, China and Peru have already enacted some environmental regulations for the finance sector. The Brazilian Central Bank said: “Sustainability is a positive asset for financial and monetary stability”.
Financial regulators should work with banks to establish common environmental due diligence standards and jointly examine how future climate and environmental scenarios could be incorporated into financial institutions’ many risk models. Deutsche Bank participates in a project (WRI and UNEP FI) creating the first carbon asset risk guidance for financial institutions. A carrot and stick approach from bank regulators is needed to encourage up-take.
Climate risk analysis: Climate and natural hazard risk needs more analysis. Beyond insurance companies, the finance sector generally does not take adequate account of natural disaster risk in asset valuations, loan books or in real estate. With accelerating natural disaster risk, this is untenable. Until natural hazard risk is appropriately accounted for, financial system risk will accumulate.
One of the initiatives announced at the UNSG Summit in September suggested that financial regulators could require public companies to publish their maximum probable annual losses to natural disasters against their current assets and operations using a ‘1 in 100’ test. The G7 should ask regulators to implement this idea.
And fourth, expanding new partnerships and instruments:
Multi-lateral and National Development Banks remain key partners but there are still too many instances of crowding out private players by competing to finance the few good projects. As the major shareholders in development banks, governments can build on efforts to change their KPIs towards leveraging private investment. More development banks should use tiered risk sharing funds, regulatory enhancements, guarantees and other structures. For new development banks like AIIB, sustainability and low-carbon should be a core mandate. The G7 should work towards placing sustainability and low-carbon as a focus for AIIB.
Climate Lab has been an excellent initiative for focused public-private discussion of concrete financing instruments. Early stage financing and the lack of bankable projects remain an issue for energy efficiency in developed countries and also for low-carbon projects in emerging markets. There is a strong need to expand project development facilities that cooperate with private sector developers. While all of the proposals have merit, we strongly support the ‘Climate Development and Finance Facility’ proposed by the Dutch Development Bank, as it has similarities to our experience in managing the European Energy Efficiency Fund (EEEF). To ensure the success of the Climate Lab, there should be an open but quick public competition for fund managers for the envisaged Facility – a role, which Deutsche Bank is extremely interested in and well positioned for.
Yieldcos and finance structures to reduce cost of capital: A yieldco is a publicly traded company that bundles operating renewable assets to generate predictable cash flows that are distributed to shareholders as dividends. The development of yieldcos first in the US and now in Europe is a game changer for engaging institutional investors and reducing financing costs. There is strong potential for replicating it in emerging markets. A challenge that needs to be addressed is that most renewable assets are owned by small project developers, communities and other organisations – not by large companies. It is time consuming to contact those many asset owners to suggest and negotiate re-financing with a yieldco. Governments should educate owners of operating renewable assets (perhaps by publishing a short guide) and encourage them to consider re-financing through a yieldco or other structures.
An Action Agenda for the G7
The application of these suggestions is complex because it requires collaboration among different sectors of societies, different departments and experts, and close alignment of activity at multiple governance levels. But the G7 has a distinguished history of collaborative financial leadership. Thinking in terms of synergies and acting collectively surely constitutes the basis for sustained economic growth, for energy security and for climate protection.
You as the G7 have a big opportunity to make gains in sustainable growth through a concerted action agenda:
Establishing a long-term decarbonisation goal;
Setting strong, predictable and rising carbon prices, and developing and restoring the international carbon market;
Positioning public pension funds as leaders of responsible investment; and
Driving a broad low-carbon and sustainable financial sector reform agenda.
Cambridge Econometrics, building on the success of the award-winning report Fuelling Europe’s Future, has undertaken a research project to assess the economic impact of decarbonising cars and vans in the UK. The project was commissioned by the European Climate Foundation and was informed by a core working group of experts in the motor vehicles industry as well as other interested stakeholders. The report “Fuelling Britain’s Future” considers the economic impact of a series of forward looking scenarios that encompass alternative visions of Europe’s future vehicle fleet.
Commenting on the report Edmund King, President of the Automobile Association (AA), said: “The cost of motoring is still the number one concern for motorists so the fact that low carbon vehicles are driving down costs is great news both for drivers and for Britain’s economy.”
Jerry Hardcastle OBE, Global Chief Marketability Engineer at Nissan, said: “The report clearly demonstrates how battery electric vehicles will continue to positively contribute to the UK economy. Beyond the jobs that we have created in Sunderland around the production of the Nissan LEAF electric car there will further developments in the products and services that support zero emissions mobility. Over time it is becoming clear that each battery EV is an investment in public health as it will also enable the necessary air quality improvements in urban environments”
Darren Lindsey, Head of Government and Public Affairs UK and Ireland at Michelin, said: “It can no longer come as a surprise to anyone that reducing emissions delivers commercial benefits to industry as well as benefits to the environment and consumers. To maximise those benefits, however, international policymakers have to create a consistent and robust regulatory framework.”
Andy Eastlake, Managing Director at the LowCVP (Low Carbon Vehicle Partnership), said: “This forward-looking report from Cambridge Econometrics builds on the findings of the LowCVP’s retrospective report, published last year. This shows how, with consistently applied policy focused on cutting emissions, we can continue to provide benefits for motorists, for the industry and, ultimately, for the UK economy and our environment – a truly winning combination.”
Alfons Westgeest Executive Director at EUROBAT (the Association of European Automotive and Industrial Battery Manufacturers), said: “We are pleased to see the positive effects for the British economy resulting from a gradual transition to low-carbon vehicles. All battery technologies are at the core of the fleet improvement and will contribute to improving performance and lowering fuel consumption and emissions of conventional, hybrid, plug-in hybrid and full electric vehicles.”
Hartwig Meier, Head of Global Product and Application Development at specialty chemicals company, LANXESS, said: “No matter the powertrain, lighter is always better. Innovative fibre-reinforced plastics have become a key technology for low carbon and electric vehicles – we expect the market to grow by 8% annually.”
Biofuels made from waste and residues could produce several hundred thousand jobs across Europe, a new study by the ICCT finds.
Europe has a significant untapped potential for converting wastes from farming, forestry, industry and households to low-carbon biofuels for transport, and for creating more than 100,000 permanent jobs in the process. However, these jobs will only be created if the EU sets ambitious 2030 policies to promote sustainable low-carbon transport fuels, backed by strong sustainability safeguards. These are the results of a new study by the International Council of Clean Transportation (ICCT).
Overall, the study explores the economic potential of advanced biofuels for twelve EU Member States. The results are based on data from the European Union’s statistics office Eurostat and input from a coalition of technology innovators and green NGOs.
Converting cellulosic waste and residues to biofuels could create up to
34,700 permanent jobs and 84,600 temporary jobs in Germany
42,528 permanent and 106,200 temporary jobs in France
9,348 permanent and 27,600 temporary jobs in the United Kingdom
9,804 permanent and 27,600 temporary jobs in Italy
8,256 permanent jobs and 21,600 temporary jobs in Poland
“Even when taking account of possible indirect emissions, alternative fuels from wastes and residues offer real and substantial carbon savings,” said Chris Malins who led the analysis for the International Council on Clean Transportation. “The resource is available, and the technology exists – the challenge now is for Europe to put a policy framework in place that allows rapid investment.”
Brussels/Berlin: The European Climate Foundation, a leading philanthropic organization with the aim of promoting the transition to a low-carbon economy, is pleased to announce the appointment of Chris Barrett as its new Executive Director, Finance and Economics.
Before joining the European Climate Foundation, Chris Barrett was Ambassador and Permanent Representative of Australia to the Organization for Economic Cooperation and Development (OECD) for three years. Prior to this, he was Chief of Staff to the Australian Treasurer Wayne Swan from 2007 to 2010, and served in the Victorian Department of Premier and Cabinet from 2003 to 2007, culminating in the position of Deputy Secretary of the Policy and Cabinet Group. He began his career as a management consultant at the Boston Consulting Group in Melbourne in 1992, and has degrees in economics and public policy from the University of Melbourne and Princeton University.
In his new role, Chris will lead an international strategy on the potential and logic of the low-carbon transition from economic and finance perspectives.
Johannes Meier, CEO of the European Climate Foundation, commented: “The necessary public and private investments for a successful global energy transformation will only be made if leaders recognise the enormous economic opportunities that go with it. The European Climate Foundation would like to make a contribution to facilitating this. We are therefore delighted that we were able to attract Chris, with all his experience and expertise, to the European Climate Foundation.”
Picture is available on request.
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