Climate and finance

It is time to deliver in line with the global climate agreement! 

Making the transition to a climate-smart economy involves all facets of our global community. If we are going to be able to meet the two-degree target, a billion dollars ($1,000 milliard) will need to be invested in renewable energy systems each and every year for the next decade. That’s a total of ten billion dollars! 

Investments must be steered away from fossil energy sources

A third of this money is already being invested, but the rest of the money has to be re-directed from, for example, investments fossil energy. To bring this about, politicians around the world have to take a close look at regulations, taxes and subsidies, so that it is more profitable and less risky to make investments in solutions to climate change rather than investing money in processes that have a negative impact on the climate.

Today fossil fuel companies are being subsidised 

According to the International Monetary Fund (IMF), the world’s fossil energy companies are subsidised to the tune of $5 billion annually. Expressed in other terms, that's $600 million per hour! This is more than the nations of the world spend on health care.

How did the IMF calculate this extreme amount? This is due to the fact that the indirect costs of air pollution, flooding and drought that are caused by climate change are included in the term subsidy, and fossil energy companies do not foot the bill for the costs of their activities to society. 

Increase taxes for fossil fuel companies

If higher taxes for fossil energy companies were set so that their costs better reflected actual costs to society, they would have a greater incentive to take measures to improve the climate. It would also better reflect their actual competitiveness in regard to other energy sources. According to the IMF, global emissions of carbon-dioxide would be reduced by 20% if subsidies for fossil energy were abolished.

Read more about subsidies of fossil energy.

How can one reduce risks to the climate in a portfolio?

Reduced exposure to fossil energy in a portfolio can be achieved in several ways:

• By transferring assets from particular carbon-dioxide intensive companies, projects and technologies in a selected sector, and then investing in particular carbon-dioxide efficient companies, projects and technologies within the same sector.
• This can also be achieved by investors encouraging their portfolio companies to do this, thus achieving significant reductions in emissions.
• Another method is to simply divest holdings in carbon intensive companies.
• A fourth strategy is to invest in companies that stand for solutions, i.e. efficient use of energy, renewable energy and adaptations to a changed climate. When large institutional investors begin to engage in discussions with companies, or reallocate assets in line with a company's emissions of greenhouse gases, it provides a strong incentive for these companies to redirect their investments from fossil-fuel dependent energy sources, to sources that reduce the company’s carbon footprint.

As a result of the growing interest among asset managers to develop more climate-smart portfolios, a flurry of new products has appeared on the market including everything from measurement methods to benchmark indices.

Measurement methods are not accurate indicators of environmental impact

Measuring carbon-dioxide emissions linked to a portfolio can be a good starting point for internal strategic development. However, the majority of measurement methods do not reveal anything about the actual impact of a company on the climate since including emissions in calculations, whose origin are found in the supply chain, production or vehicles, is characterised by a great amount of uncertainty.

Benefits to the climate that certain products contribute such as solar panels are also not included. To illustrate, you could say that if an asset manager wanted to lower the carbon footprint in a portfolio, then he or she could just replace a solar panel company with a bank that finances coal mines.

Carbon footprint should not be used as a method for rating a company’s impact on the climate

In other words, the carbon footprint should not be used by an asset administrator as a type of climate rating for a fund when informing customers. However the method can be helpful as a first step in an internal analysis.