Business big hitters highlight the huge growth in climate risk management

“Investors are running ahead of governments.”

This is arguably the most striking and encouraging statement heard so far at the Paris climate conference. It was made in a remarkable speech at a forum on private financing by Martin Skancke, chair of Principles for Responsible Investment (PRI), the world’s largest network of investors.

To drive home the point, he referred to the Montreal Carbon Pledge, which in a little over a year has been signed by 120 investors who control more than US$10 trillion in assets (these guys speak in trillions, rather than billions).

It is true that the investors are committing only to measure and disclose the carbon footprint of their portfolios. But it’s also true that “what gets measured gets managed” – which in this case means, once it’s measured you have to manage it.

Another panellist at the forum referred to “the quiet revolution” in green investment, including huge growth in green bonds, expected to be more than US$40 billion this year. The aim is to expand it to US$900 billion. ING France chief executive Karien van Gennip described how her bank’s recent offering of green bonds was seven times oversubscribed within 48 hours.

Shaun Tarbuck, head of the world’s biggest insurance federation, spoke of “a new paradigm” in the business world, emphasizing that these are not just political statements. Even China has developed a strategy for greening its financial system.

Although Bill Gates' billionaires’ initiative has all the sex appeal and attracted the media attention, the real force in bringing about the transition to low-carbon energy economies will come from private and institutional investors. Not only do they control vastly more cash than the billionaires but they are changing the structure of energy economies now, rather than gambling on “breakthrough technologies” that will not have an appreciable impact for 20 or 30 years, when it will already be too late.

Sea change

The sea change in the global investment community has occurred only in the past 12 months. The signs have all been there, not the least of which is the recognition by the G20 group of major economies that climate change represents a threat to the stability of the global financial system.

Last April, G20 finance ministers and central bank governors asked the Financial Stability Board (FSB) of the world’s central banks to prepare a report on climate risk, to be considered at its next meeting in China. This is a big deal; it’s the system, not individual corporations, that is now seen to be at risk.

The FSB is chaired by Bank of England governor Mark Carney, who in September created huge waves in the global financial sector with a speech to insurers warning of serious risks to investors from climate change (a warning met with squeals from the fossil fuel industry).

On Friday, at a side event at the conference, Carney listed the types of risk to which financial markets are exposed, including direct risks due to massive insurance payouts after climate disasters, and liability risks for directors should corporations be sued.

But he put most stress on the exposure of capital providers to an “abrupt transition” to a low-energy economy, due to future sudden changes in policy or sentiment. Investors have a fiduciary responsibility to prepare. He may have been thinking of a sharp write-down in fossil fuel asset values as the issue of unburnable coal gathers momentum. Carney wants a market structure that will bring about “an ordered transition” to a zero-carbon economy.

Carney was joined at the event by Michael Bloomberg, who will chair the new FSB taskforce. The businessman and former New York City mayor stressed that corporations have to think about their future financial liabilities from carbon emissions, noting that GE has been ordered to clean up the Hudson River, 20 years after it finished polluting it. No one saw that coming.

Business versus politics

At the same time that Carney and Bloomberg were speaking about climate risks in the financial sector, Laurent Fabius, the president of the conference, was giving a briefing on progress in the negotiations. Two things stood out about the audiences for the competing events. Carney-Bloomberg attracted a bigger crowd and most were wearing dark blue suits. At no previous UN climate summit would a leading central banker have turned up, to have his words copied down by men and women in business attire.

Drew a crowd: Michael BloombergEPA/Ian Langsdon

Today, if you read the business press, climate change is no longer treated as if it were happening in some other world of no interest to investors. So whether the final agreement to come out of the formal negotiations next Friday is strong or weak, the importance of it is the signal it is sending to investors.

The unmistakable message is that the world is changing: the major economies are beginning the transition to low-carbon energy systems, and if you are not planning for it you are not doing your job. It’s taken them a long time, but investors now get it. The issue is not whether they care about climate change, but whether they are properly managing risk in a changing world.

Mark Carney pointed out that the 185 national climate targets on the table for this conference contain real information about where governments and the world are headed, and that it is legitimate for investors to ask companies “what’s your strategy for net zero (emissions)?”

When asked about Republican presidential candidates, Bloomberg was scathing, dismissing their debates as “Kabuki theatre”. He said that he keeps one of the four TV screens by his desk tuned to Fox News. Fox recently spent a whole day expressing outrage at Obama’s climate change efforts, but not one of the talking heads was from business. “No business person could get away with it,” he said.