Market Perspectives: Responsible Investing

Paris climate deal: the investor reaction

paris-climate-deal-investor-reaction

“There are hundreds of billions of dollars ready to deploy to countries around the world if they get the signal that we mean business this time. Let’s send that signal.” — President Barack Obama, Opening Ceremony Speech 21st Conference of Parties (COP21)

Paris Agreement meets all key investor expectations:

  • Long-term ambition of global carbon neutrality
  • Review mechanism: individual country plans to increase in ambition every five years
  • Global regulators to focus in 2016 on financial sector’s role in addressing climate change

The UN Climate Summit in Paris, which saw the attendance of the largest group of heads of state in history, has delivered a strong deal to maintain temperature increase “well below two degrees Celsius (2°C).” This will have a profound impact on energy producers and users alike. The implementation of the Agreement will have implications for both fund management and strategic asset allocation decisions.

In the days following the Paris climate agreement, over 800 non-state actors including BMO Global Asset Management endorsed the Paris Pledge1, a supportive statement to ensure “that the ambition set out by the Paris Agreement is met or exceeded to limit global temperature rise to less than 2 degrees Celsius.”

Paris: did it meet investor expectations?

Investors—including BMO Global Asset Management—participated in discussions with policymakers in the run-up to the Paris talks. The key asks were to give the investment community a clear direction of travel including a long-term target, supported by country-level plans.

The Paris Agreement2, supported by 195 countries, met all these expectations. Key points are:

  • 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.
  • 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.
  • 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.
  • Transparency: the Agreement has introduced a monitoring and verification requirement for all countries with a global stocktaking of reduction efforts in 2023. This will not only increase the certainty that measures are being implemented, but also serve as peer pressure through “naming-and-shaming” of countries lagging behind.
  • Finance: 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 combined effort of the national emission reductions plans submitted ahead of the Paris meetings still falls short of the 2°C limit—let alone the 1.5°C ambition in the Paris Agreement. But in our view, the direction of travel is now clear, and there are mechanisms in place for countries to be held accountable for their actions. This gives investors greater clarity than ever before about the political willingness to transition the global energy system to a post-fossil fuel future.

“Private sector involvement was pivotal”

French President François Hollande praised the support of “businesses and investors” in the negotiating process. Non-state actors have shown their strong support: over 7,000 cities representing 32% of global GDP and 5,000 companies representing the majority of global market capitalization and over $38 trillion in revenue had made low-carbon pledges. BMO Global Asset Management has been at the forefront of investor action, taking a leading role in promoting joint investor activity through the Institutional Investors Group on Climate Change (IIGCC).

“Paris deal is nothing else than an historic milestone for the global energy sector.” — Fatih Birol, Executive Director, International Energy Agency

Key activities in 2014-15 included co-authoring, with the IIGCC, the Global Investor Statement on Climate Change,3 which attracted 409 supporters with over $24 trillion in assets and was delivered to Heads of State at the UN Secretary General’s Climate Summit in September 2014. We had also co-authored an open letter to G7 and G20 finance ministers4 expressing investor’s concerns regarding the systemic nature of climate risks, which was signed by 120 investor CEOs, and had the support of four regional investor groups on climate change and the Principles for Responsible Investment.

During the Paris meetings themselves, we were present during the climate summit in Paris as part of the IIGCC observer delegation, helping to represent the investor’s voice during meetings with a number of country negotiating teams, including the US, EU and G77.

What is next for investors?

The Paris conclusions do not contain any surprises that would have an immediate impact on company or portfolio valuations, with all the country-level policy announcements having been made well in advance. The implications will take time to understand and to filter through to valuations, and will depend on investors analysing the national contributions and identifying the sector and company impacts.

Significantly, 2016 may see a scaling up of actions by financial regulators on climate change, with potential consequences for investors. The Paris Agreement commits governments to “making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

As implementation of the Agreement gets underway, investors may be expected to take actions to support this—but what form this will take is unclear. Key developments in financial regulation to watch include:

  • Financial Stability Board: Mark Carney, head of the Bank of England and chair of the Financial Stability Board (FSB), announced at the Paris Summit that the FSB was establishing an industry led Task Force on Climate-related Financial Disclosures (TCFD) to be chaired by Michael Bloomberg; this is expected to conclude at the end of 2016.
  • France: The Energy Transition Law requires institutional investors to provide the carbon footprints of their investments, to review their portfolio’s alignment with a low-carbon development pathway, and to disclose methods of integrating climate related risks. Guidance on implementation is expected to be finalized shortly.
  • Sweden: Sweden was the first country to announce a review aiming at creating an obligation for its financial regulator to ensure the financial system is “financing sustainable development.”

These developments follow the extensive work by the Organization for Economic Development and Co-operation (OECD), United Nations and others to understand which policies hinder or support the deployment of capital towards sustainable solutions.

“We are sending a clear signal to business, as one voice of 190 nations that the World is now on a new path.” — John Kerry, US Secretary of State, after the adoption of Paris Agreement

As stakeholders at the highest ministerial levels were consulted during this research, it is now firmly embedded within the G20 process with the Chinese G20 presidency making “Green Finance” a priority area for 2016.

The Paris deal makes climate change, and the energy transition, a mainstream investor issue. The focus now shifts to implementation. We expect regulators’ attention to climate change to continue to increase, both as a result of the deal itself and in the broader context of a trend toward encouraging investors to consider environmental, social and governance issues—as seen in developments including the introduction of Stewardship codes in Asia, the revisions to the E.U. Shareholder Rights Directive and the Ontario Environmental, Social and Governance (ESG) legislation for pension plans.

Existing investor initiatives to improve the understanding of climate risks and opportunities, such as the “Climate Change Investment Solutions: A Guide for Asset Owners” compiled by the Global Investor Coalition, provide a strong foundation for the discussions we expect to continue into 2016 and beyond.

 

Download PDF

 

Responsible Investing Policy and Assessment Report

 

 

 

1 http://parispledgeforaction.org/whos-joined/
2 http://unfccc.int/documentation/documents/advanced_search/items/6911.php?priref=600008831
3 Global Investor Statement on Climate Change http://investorsonclimatechange.org/statement/
4 Open letter to Finance Ministers in the Group of Seven http://www.iigcc.org/publications/publication/open-letter-to-finance-ministers-in-the-group-of-seven-g-7

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.