The battle to halt climate change

World leaders are meeting in Paris to agree action on climate change. Previous talks collapsed and achieved nothing. Will this time be different? Simon Wilson reports.


He's not the only stranded asset

What's happening?

The goal of the UN Climate Change Conference ("COP21"), now meeting in Paris, is to achieve a legally binding and universal agreement on climate, from every nation, that will have the effect of cutting greenhouse gas emissions so as to limit the global temperature increase to 2C above pre-industrial levels by 2100. It's a big ask and the measurable criteria for success are very long term. But according to most observers, the chances of a deal that can be presented as a genuine breakthrough are much higher than at the last big climate jamboree in Copenhagen in 2009. That's because the political will has hardened.

In the past nine months, some 170 countries have produced responses to the UN's call for an "intended nationally determined contribution" (INDC) ie, specific commitments to cutting emissions. Even the likes of China and America have made commitments to do so. But will it make much difference? Currently, according to figures from a COP21 source and cited by Will Hutton in The Observer, the world produces 50 billion tonnes of carbon dioxide a year, and is set to produce 65 billion by 2030. If all the INDCs are met, the likely outcome in 2030 is 55 billion tonnes still more than current levels.

What does this imply?

This isn't the place to get into the politics of global warming or to debate the forecasts made by climate scientists. But for investors there are two broad implications. First, governments, including those of the world's two biggest economies, America and China, are becoming more serious about tackling emissions and better at co-ordinating their efforts.

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Second, in the decades ahead governments could go even further to achieve a low or no-carbon economy. In other words, the lessons to be drawn from Paris echo the recent warning from Bank of England boss Mark Carney climate change is becoming a core issue affecting financial stability, and investors need to wake up to the "potentially huge losses" they face from climate change.

What losses are these?

Most obviously, from the risk (discussed in previous MoneyWeek briefings) of "stranded assets". On Carney's reading of the scientific consensus, the "carbon budget" the world can afford, if it is to meet the 2C target, amounts to 20%-33% of proven reserves of oil, gas and coal. If "even approximately correct", this "would render the vast majority of reserves stranded", Carney told a City audience a few weeks ago.

In other words, oil, gas and coal assets that companies have paid for and invested in extracting will have to stay in the ground. Carney noted that 19% of FTSE 100 companies were in the natural resources and extraction businesses, and warned that "a wholesale reassessment of prospects" was entirely plausible and if it occurred suddenly, it could destabilise the financial system.

So what should investors do?

As ever, check your asset allocation and consider whether you are comfortable with the risks involved. An interesting finding from a report earlier this year by Mercer ("Investing in a Time of Climate Change") is that a 2C global temperature rise need not "have negative return implications for long-term diversified investors at a total portfolio level".

However, successful investing in this scenario would involve a significant move away from fossil fuels towards "infrastructure, emerging-market equity and low-carbon industry sectors" in particular solar and other renewables, and the kinds of sectors targeted by the Breakthrough Energy Coalition an alliance of big name investors (Bill Gates, Mark Zuckerberg, Richard Branson et al) and governments launched in Paris this week.

The group will mainly invest in early-stage clean-energy firms across a range of sectors, such as electricity generation and storage, transportation and agriculture. The big picture, according to research by think tank 2 Degrees Investing Initiative, is that the world's major stockmarket indices are in effect a bet on a scenario of 4C-5C warming. "That's not a winning bet" the world's governments won't let it happen.

What's the alternative?

The alternative scenario a successful effort to stick to the 2C limit would imply, in the words of Carney again, that "financing the decarbonisation of our economy" is a major opportunity for long-term investors and that "green" finance cannot remain a niche interest. According to recent figures from the Climate Policy Initiative, global investment to cut carbon emissions and vulnerability to climate change grew 18% to $391bn in 2014 (including a 26% uplift in spending on renewables). Its report estimates that around $16.5trn is needed by 2030 to shift the global energy system in line with the 2C goal. If anything like that is ultimately spent, it means climate change is not just a threat it's an opportunity.

'Institutionally fossilist' investing

The "clean trillion" dollars a year needed to addressenvironmental sustainability may sound a lot, says David Pitt-Watson in the Financial Times. But it's small beer compared tothe $225trn currently invested in global capital markets, whichin turn represent the savings of millions of people. Plenty ofinvestors and financiers are already alive to the issues: nearly 400 financial institutions representing $24trn in assets signed a joint statement urging world leaders to agree a deal in Paris.Now, more institutional and other investors need to wake upto the dangers of "institutionally fossilist" investing the verylong-term risks could arrive sooner than they think.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.