Good COP, Good COP – The Paris Agreement

January 14, 2016 Categories: Investment, Investment Strategy

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Last month’s UN Climate Summit in Paris, COP21, produced an agreement that exceeded most expectations.

Now that investors, with many others, have helped governments to act, it seems likely that investors themselves will be expected to play their part in addressing climate change. What does that mean? It will mean increasing the flow of finance for renewables, introducing low carbon investment strategies, considering the advantages of green bonds, and collective engagement with companies through the exercise of share ownership rights (e.g. the BP and Shell AGM Shareholder Resolutions in 2015).

So, the world’s press have heralded the Paris Agreement as historic. Laurent Fabius has been lauded for his diplomatic skills. The aspirations of some countries have collided with the realities of others. Yet the collective political will is impressive. What did two weeks of negotiation, preceded by several years of work behind the scenes, achieve? The Paris Agreement, involving 195 countries, sets out commitments to:

    • keep global temperatures “well below” 2.0C above pre-industrial levels, and endeavour to limit them further, to 1.5C above
    • limit the amount of greenhouse gases emitted by human activity to the same levels that trees, soil and oceans can absorb naturally, beginning between 2050 and 2100
    • review each country’s contribution to cutting emissions every five years, so collectively they scale up to the challenge
    • deliver significant financing by rich nations to help poorer nations adapt to climate change

What conclusions can we draw? Firstly, climate change is firmly on the agenda of governments. The Paris Agreement provides a clear signal for investors, companies, governments and civil society that the transition to a low carbon economy is inevitable. Many years after the Kyoto Protocol, and six years after the disastrous Copenhagen COP15, governments have come together to start tackling climate change. Is there more to do? Indeed. Governments will need to scale up their ambition, and deliver on their commitments. Governments need to provide the framework for the private sector to move forward and take advantage of the opportunities which will arise. Will all this take a long time? Yes.

Secondly, regulators are beginning to move. Following BoE Governor Mark Carney’s Lloyds speech, he has used his role as chair of the Financial Stability Board to make recommendations to the G20. So we now have the Task Force on Climate-related Financial Disclosures, with Carney announcing in Paris that it’s to be chaired by Michael Bloomberg. Whilst this work is likely to focus on corporate disclosure, we should note that one UK pension fund has recently published an investment policy which states: “Our objective is to ensure that our Fund’s investment portfolio and processes are compatible with keeping the global average temperature increase to remain below 2°C relative to pre-industrial levels”. They may be the first, but they won’t be the last.

So investors will play their part, and be expected to do so. For example, a Russell Investment’s client recently funded a low carbon global equity portfolio. We expect increased interest in this area in 2016. In support of this, Russell Investments recently became a member of IIGCC, the Institutional Investors Group on Climate Change.

So a historic COP21, a strong signal by governments, and a Paris Agreement that will resonate down the years!

Mike Clark – Director, Responsible Investment

 

Russell Investments Wire - Mike Clark

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