PRIVATE FINANCE WILL PLAY KEY ROLE IN MASSIVE INVESTMENT NEEDED TO SHAPE TRANSITION TO LOW-CARBON GLOBAL ECONOMY, GENERAL ASSEMBLY MEETING TOLD

9 June 2008
GA/10718

PRIVATE FINANCE WILL PLAY KEY ROLE IN MASSIVE INVESTMENT NEEDED TO SHAPE TRANSITION TO LOW-CARBON GLOBAL ECONOMY, GENERAL ASSEMBLY MEETING TOLD

9 June 2008
General Assembly
GA/10718
Department of Public Information • News and Media Division • New York

Sixty-second General Assembly

Informal Meeting

 on Investments and Climate Change (AM)

PRIVATE FINANCE WILL PLAY KEY ROLE IN MASSIVE INVESTMENT NEEDED TO SHAPE

TRANSITION TO LOW-CARBON GLOBAL ECONOMY, GENERAL ASSEMBLY MEETING TOLD

Keynote Speaker Says Some Venture Capitalists Calling

Clean Energy One of Biggest Economic Opportunities of Twenty-First Century

With over $200 billion needed just to return carbon emissions to current levels by 2030, private finance would play a key role in the massive investments needed to address climate change and shape the transition to a low-carbon global economy, Srgjan Kerim, President of the General Assembly, told a gathering on private investment and climate change this morning.

The meeting, the first follow-up to the General Assembly thematic debate on climate change held in February, was aimed at understanding how financial institutions reacted to and were impacted by the current and forthcoming climate regimes, Mr. Kerim said.  It brought together principals of a range of private-sector investment firms with Government, United Nations and civil society representatives.

Mr. Kerim stressed the complexity of the subject, given the range of the kinds of investors represented at the meeting.  They included generalist banks, investment banks and insurers, who were both risk experts and major investors in their own right.  They also included pension funds, which were concerned with the protection and growth of assets over the long term; and hedge funds and private equity specialists, which had the ability to invest major sums on a very short-term basis.

However, all were posed with certain challenges in regard to policy, he said.  For example, did they hope for more certainty for their investments and, therefore, for a more binding regulatory regime, or did they prefer to keep more liberty because it could mean a better return on investments?

In the keynote address, Mindy Lubber, President of Ceres and Director of Investor Network on Climate Risk, said the incentive for most companies would be the more binding regime in an international framework.  Setting aggressive carbon limits and putting a cost on carbon dioxide emissions would catalyse capital markets to develop smart and cost-effective technologies to reduce global warming pollution throughout the world.

In the past four years, she said, global clean energy investments had quadrupled to $150 billion in 2007, with some venture capitalists calling the clean energy sector one of the biggest economic opportunities of the twenty-first century.  Companies such as Toyota were growing at breakneck speed with their hybrids and fuel-efficient vehicles.

Key drivers of the global economy, such as major banks and investment firms, were showing more due diligence in avoiding risky investments, with some beginning to calculate a “cost of carbon” into their lending decisions.  Bank of America had gone as far as to set specific greenhouse gas reduction targets in its lending to the utility sector.

Following Ms. Lubber’s address, a panel of private-sector principals presented the perspectives of different kinds of investment firms, moderated by Jeffrey Ball, Environmental News Editor of the Wall Street Journal.

Panellists included Martin Kuscus, Chairperson of the first board of trustees for the South African Government Employee Pension Fund; James Cameron, Vice-Chairperson of Climate Change Capital, an investment bank; Oliver Bäte, Chief Operating Officer and a member of the management board of Allianz SE, an insurance company; and Pierre Lagrange, co-founder and Managing Director of GLG Partners LP, a hedge fund; and Jack Rivkin, Chief Investment Officer of Neuberger Berman of the Lehman Brothers group, and a member of Lehman Brothers Climate Change Council.

In their presentations, and in the question-and-answer discussion that followed it, panellists outlined the scope of environmental concerns that affected the market in a current situation that was marked more by uncertainty than by predictable regulation regimes.  They cited situations where specific local regulations spurred investment and technological innovation.

Panellists agreed that foreseeable incentives needed to be put in place through stable regulation, which could get companies to move, rather than taxes paying for an overall adaptation and mitigation scheme.  In addition, consistent and clear information on all aspects of climate change factors had to be readily available.

In response to the panel’s positing of a substantial worldwide carbon tax, representatives of developing countries reasserted the concept of equal but differentiated responsibilities.  Panellists replied that the key point was that there was a cost of carbon that had to be dealt with, and the sooner and more clearly it was dealt with, the better.

Also speaking during the question-and-answer period, Sha Zukang, United Nations Under-Secretary-General and head of the Department of Economic and Social Affairs, said he realized that equal but differentiated responsibility was not the concern of private enterprise, but it was a major principle for international organizations.  It also had to be remembered that climate change had to be dealt with as part of sustainable development.  The high cost of energy, and how that could affect investments in a climate change regime, technology transfer, and the scope of carbon trading were also broached in the wide-ranging discussion.

Closing remarks were delivered by Naveen Jindal, Executive Vice-Chairman and Managing Director of Jindal Steel and Power Ltd., Diana Farrel, Director of Mckinsey Global Institute, and Paul Clements-Hunt, head of the Finance Initiative of the United Nations Environment Programme (UNEP).

Mr. Hunt said it was clear from the discussion that the defining challenge for financial services and capital markets in the coming decades would be to de-carbonize economies, adapt to new conditions, put communities on a new clean energy footing and create the clean transport and industrial infrastructure needed worldwide.  The policy and investment communities must come together for that to occur.

Background

The General Assembly met this morning to hold an informal meeting on global private investments and climate change, to follow up on the high-level thematic debate on climate change held last February (see Press Releases GA/10687, GA/10689 and GA/10690).

Opening Statements

SRGJAN KERIM, President of the General Assembly, said private finance played a key role in the massive investments needed to shape the transition to a low-carbon global economy.  Addressing the threats posed by climate change would be tremendously expensive.  It was estimated that additional global investment and financial flows of over $200 billion would be necessary just to return emissions to current levels by 2030.  Further, public financing would be far from sufficient to solve the problem.  Indeed, the United Nations Framework Convention on Climate Change had estimated that 86 per cent of the global finance needed to respond to climate change would come from private investment.  It was evident, then, that fostering a closer dialogue between private investors and public decision-makers was important.  The current meeting was aimed at understanding how financial institutions reacted to, and were impacted by, the current and forthcoming climate regimes.

He said major institutional investors, such as pension funds, as well as more specialized actors, such as private equity houses, held a large percentage of the $54 trillion global equity markets.  Total investment in physical assets was projected to triple between 2000 and 2030, providing a window of opportunity to direct investment flows into new facilities that were climate friendly or “climate proof”, a large share of which would be in developing countries.

The meeting would try to describe how private investors affect climate change by their investment choices and how climate change impacted investment choices made by investors, he said.  The subject was not simple; the finance industry was composed of very diverse actors who operated according to different rationales and different time frames, ranging from the very short term to the very long run.  They included generalist banks, investment banks and insurers, who were both risk experts and major investors in their own right.  They also included pension funds, which were concerned with the protection and growth of assets over the long term; and hedge funds and private equity specialists, which had the ability to invest major sums on a very short-term basis.

He said he hoped that the discussion would help to provide some understanding of the expectations major actors had for their investments.  For example, did they hope for more certainty for their investments and, therefore, for a more binding regulatory regime, or did they prefer to keep more liberty, because it could mean a better return on investments?

MINDY LUBBER, President of Ceres and Director of Investor Network on Climate Risk, said her organization was a leading a coalition of investors, environmental organizations and other public interest groups working to address environmental and social challenges.  Ceres had collaborated with the United Nations Environment Programme (UNEP), among others, to develop a global standard for corporate reporting on environmental, social and economic impacts.  Called the “Global Reporting Initiative”, it was now being used by over 1,300 corporations.

She said that, in 2003, Ceres had launched the Investor Network on Climate Risk at the United Nations, with assets totalling $5 trillion.  Examples of investors within the network included pension funds from California, Connecticut and New York, and asset managers, such as American International Group Investments, Deutsche Asset Management and State Street Global Advisors.

A further 450 investors had attended the third Investor Summit on Climate Risk, held in February and co-hosted by Ceres, representing over $22 trillion in assets, she said.  An action plan adopted at the Summit called on participants to press the United States Securities and Exchange Commission to require companies to disclose the financial risks they faced from climate change.  Participants also pledged to require tougher scrutiny of carbon-intensive investments, such as coal-fired power plants that might pose long-term financial risks, and to deploy $10 billion over the next two years in clean technologies.  The International Energy Agency recently estimated that as much as $50 trillion would be needed through 2050 in new energy infrastructure and equipment to reduce carbon dioxide levels by half of current levels.

She said that, in the past four years, global clean energy investments had quadrupled to $150 billion in 2007, with some venture capitalists calling the clean energy sector one of the biggest economic opportunities of the twenty-first century.  Companies such as Toyota were growing at breakneck speed with their hybrids and fuel-efficient vehicles.  Key drivers of the global economy, such as major banks and investment firms, were showing more due diligence in avoiding risky investments, with some beginning to calculate a “cost of carbon” into their lending decisions.  Bank of America had gone as far as to set specific greenhouse gas reduction targets in its lending to the utility sector.

She said it was essential to develop an international framework to reduce greenhouse gases.  Such a framework would correct a significant market failure -- namely that there was no cost for climate pollution.   Investors wanted to correct that failure and put a price on pollution that caused global warming.  Setting aggressive carbon limits and putting a cost on carbon dioxide emissions would catalyse capital markets to develop smart and cost-effective technologies to reduce global warming pollution throughout the world.

“The stakes are enormous, time is short, and generations to come are counting on you and me -- on all of us in this room today -- to meet the climate change challenge,” she concluded.

Panel Discussion

A panel discussion on the impacts of the climate regime on future investments was moderated by Jeffrey Ball, Environmental News Editor of the Wall Street Journal.  Panellists were meant to represent both long- and short-term investors, Mr. BALL said, and included Martin Kuscus, Chairperson of the first board of trustees for the South African Government Employee Pension Fund; Pierre Lagrange, co-founder and Managing Director of GLG Partners LP, a hedge fund; James Cameron, Vice-Chairperson of Climate Change Capital, an investment bank; Oliver Bäte, Chief Operating Officer and a member of the management board of Allianz SE, an insurance company; and Jack Rivkin, Chief Investment Officer of Neuberger Berman of the Lehman Brothers group, and member of Lehman Brothers Climate Change Council.

Mr. KUSCUS noted that the value of carbon markets had been estimated at $64 billion in 2007, although Africa had not yet benefited in any significant manner.  The Pension Fund he represented was exploring ways to work with companies in the South African mining and extractive sectors, so that they would disclose their carbon performance in an effort to implement greenhouse-gas reduction initiatives.  The Pension Fund owned significant stakes in companies and had a direct ability to communicate its concerns with company boards.  It was also a founding signatory of the “Principles for Responsible Investment” framework, backed by 340 institutional investors representing $14 trillion, which was an investor framework to consider environment, social and governance issues.

He stressed the pressing need to move Africa’s climate to the centre of climate change discussions, especially on addressing how the new form of carbon capital could flow to the continent’s diverse countries.  Africa’s rich potential as a source of Clean Development Mechanism projects was still greatly underexplored.  Policy-makers should unlock the potential of investors throughout the world, by working with stock exchanges to require disclosure of environmental, social and governance performance as a standard listing requirement.  They should enable dialogue between investors, as well as commission reports on the roles and responsibilities of pension funds.

Mr. LAGRANGE said hedge funds were often positioned as short-term investors, but they also tried to form long-term relationships with the objects of their investments.  Environmental investment was in its infancy and could be considered in the categories of ethical investment, socially responsible investment and thematic investment, of which the most promising area involved climate change, which would increasingly weigh on companies’ valuation and performance.  It would have as big an impact as the Internet on companies and consumer behaviour.

He said that carbon credits showed that big differences in environmental liabilities existed between companies among the same sectors, and that all sectors were impacted.  Those liabilities represented on average 3.4 per cent of market cap, which were not yet being priced by the market.  For that reason, his company’s investments, which favoured companies with lower environmental footprints or that offer cleaner technology, did not exclude any sector.  In that way, their environmentally driven fund had outperformed the broader market by 9 per cent since launch, with a 50 per cent lighter environmental footprint on average.  They had found that good environmental awareness, reporting and practices were becoming a proxy for good management and operational performance.

With more effective and mandatory environmental disclosure and mandatory cap and trade schemes, markets would more quickly and more efficiently price in the declining profitability of the heaviest polluters and rising profitability of the lightest, he said.  “Nothing incentivizes management teams to reduce their environmental footprint as much as a falling stock price,” he said.  Policy-makers and Governments could help by making environmental disclosure mandatory worldwide, globalizing the flows-tracking scheme instituted by the United States and supporting research that explored the links between the environmental performance of a company and its financial and equity price performance -- what he called “green alpha”.

Mr. CAMERON noted the growing sense that things could be fixed by the market alone through power residing in private hands.  Although the strength of the private sector was impressive, he suggested that Governments should also be called on to respond in some way, since they had a responsibility to promote the public interest of private citizens, after all.  But, it was equally important that individual States understood the necessity of cooperation with other Governments, because of the immense and pressing nature of the problem.  International policy-making institutions, in turn, must work to organize that effort.

He also noted that there was insufficient capital in Government hands to deal with the problem single-handedly.  Even with assistance from the World Bank or other international monetary funds, public treasuries could not rival the $57 trillion in private capital that currently existed.  If the international community could create instruments to move that capital in a way that rewarded the private sector for its efforts, much progress could be made.  His company, Climate Change Capital, was an asset management business that dedicated $1.6 billion solely to reducing greenhouse gas emissions, as well as for investing in technology and infrastructure linked to clean power and water.  It was focused equally on conducting a proper evaluation of the financial benefits of environmentally friendly water- and land-use policies, green buildings and so on, as well as understanding what signals were being picked up by public equity markets regarding green policies.

Mr. BÄTE said that, on the insurance liability side of the issue, there had been over $100 billion paid out for natural disasters last year and that fact needed to be taken into account in all discussions.  On carbon markets, he said the system needed to be expanded -- European emissions trading was worth around €3 billion, equalling 1.6 billion tons of carbon traded in 2007, which was up 55 per cent over 2006. 

He said that, in order to shift to a low-carbon economy by 2020, however, total clean energy investments must reach €2 trillion.  In order for that to happen, carbon prices needed to become standard globally, and stable regulatory regimes had to be instituted.  In addition, Governments and international institutions had to use their clout for the funds they controlled, making sure that all investments from those funds were directed towards cleaner investments.

Mr. RIVKIN said his company had reduced its carbon footprint, created a climate change council that facilitated dialogue among stakeholders and employees, and established rules of engagement with clients to decide what activities the company would, and would not, finance.  His company represented a small part of the available private capital that could be brought to bear on climate change issues.  It had chosen to focus on wind power, believing its underlying technology to be “stable” and facing limited public resistance -- and virtually no Government resistance.  Although using wind power could help reduce carbon emissions by 200 million tons, some 28 billion tons were currently being emitted per year, and would grow to 62 billion tons by 2050.  The magnitude of the problem was too overwhelming for current technology to tackle.

He said the estimated “cost of carbon” stood at around $40 per ton.  If that cost were to be made explicit, private capital would naturally adjust to take it into account.  Some investors were beginning to price it in, but, because of uncertainty, were not investing as much as they could.  Technology breakthroughs were required to encourage private capital to flow away from risk and towards certainty.  If ever there was an issue that called on the United Nations active effort, it was in making clear the magnitude of the necessary investment.  At the same time, each nation could begin acting individually to meet the mandate of carbon reduction, according to its own resources and needs.  Investment needed to start happening soon, and it was important to start providing clear signals to investors, so they could begin the hard work of building plants and equipment.  As the cost of carbon became clearer, the financial sector would change its attitudes towards different companies and countries -- just as the value of companies would rise and fall, so too would the “values” of countries.

Closing Remarks

NAVEEN JINDAL, Executive Vice-Chairman and Managing Director, Jindal Steel and Power Limited, offering a business perspective, noted that the impacts of climate change were disproportionately higher on developing countries.  Developed nations must, therefore, realize the impact of continued inaction on an already stressed developing world.  The Climate Change Convention had determined that around 86 per cent of funds for responding to climate change would come from private sources; it would seem that a large number of companies were already turning green.

However, he noted that the adaptation fund had managed to collect only $48 million, even though there were opportunities for businesses to make a fortune in helping clean the planet.  Thus, the focus should be on galvanizing businesses to respond.  The private sector must gear up for a low-carbon future and national policies must support such action.  The international regime must do the same through its agreements on climate change, and setting an appropriate price on carbon would also help.  The high price of oil was already a form of carbon tax, but the benefits were being consumed by producers without improving the environment in any way.  The challenge lay in developing governance practices that were environmentally friendly.

He also stressed the importance of providing access to environmentally friendly technology at affordable prices, possibly creating a competitive advantage for solar, wind and hydro-powered solutions.  Nuclear technology and clean coal should be pursued rigorously.  Public transport networks must be expanded; in fact, railways consumed one fifth of the energy used by road transport.  Adequate incentives should be provided for the use of rainwater harvesting and other environmentally neutral activities.  Businesses must benchmark themselves to radically increase their energy efficiency, while activating women and children to drive change.  Finally, he warned that no change would be brought about if lifestyles and consumption patterns were not altered.  “The world has enough to satisfy everyone’s needs, but not everyone’s greed,” he said, quoting Gandhi.

DIANA FARREL, Director of Mckinsey Global Institute, said that the single most important thing to do now was to invest in energy efficiency, even before a global regime was created.  It could immediately spur action on the fronts of both reducing carbon emissions and increasing economic growth.

PAUL CLEMENTS-HUNT, head of the Finance Initiative of the United Nations Environment Programme (UNEP), said that, from the discussion today, it appeared that climate change presented two Janus-like faces to financial services.  On the one side, there were unimaginable systemic risks and vast, emerging liabilities, which could approach $1 trillion per year by 2040.  On the other side of the coin, banks, insurers and investment houses had witnessed the rapid evolution of a carbon market that had more than doubled from 2006 to 2007.

It was now clear that the financing and investment challenge to de-carbonize economies, adapt to new conditions, put communities on a new clean energy footing and create the clean transport and industrial infrastructure needed would be the defining challenge for financial services and capital markets in the coming decades.  A significant scaling up of efforts was required to meet the challenge, however.  The policy and investment communities needed to come together for that to occur.

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For information media • not an official record
For information media. Not an official record.