Beyond Lima: Major Investors
By Isabel Hilton
The climate agreement reached in Lima this weekend sets the stage for continued negotiations. But according to some analysts, getting major financial institutions to forgo fossil fuels and invest in sustainable growth is the key to avoiding the worst impacts of climate change.
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15 Dec 2014
The United Nations climate talks in Lima, Peru — the world’s most recent attempt to reach an agreement on how to deal with climate change — limped to a late close in the small hours of Sunday morning after narrowly avoiding breakdown.
After 12 days of meetings and more than 36 continuous hours of last-ditch negotiations, a loose draft emerged that provided for non-binding commitments from each nation to reduce its fossil fuel emissions. But a final deal that satisfies both rich and poor countries, and distributes the burden of cutting emissions and adapting to climate change impacts, remains far off. The final deadline is
Cris Bouroncle/Getty Images
Climate negotiations in Lima stretched into the early hours of Sunday, December 14.
December 2015 in Paris, for an agreement that would come into force in 2020.
Much of the argument in Lima was about the finance that will be needed to decarbonize the world’s energy supply, improve efficiency, redesign cities and transport systems, and to upgrade infrastructure in order to bring down emissions. Further large sums will be required to adapt to the climate change that is already unavoidable, even if emissions can be brought down fast enough to keep global average temperature rises below 2 degrees Celsius (3.6 degrees Fahrenheit).
Poor countries complain that rich countries are falling down on their promises to help them to avoid increasing their emissions. Vulnerable countries argue that those that have grown rich by emitting climate-changing greenhouse gases should pay for poor countries to adapt and compensate the hardest hit for the damage they have caused.
Five years ago in Copenhagen, a fund was announced to help poor countries make the necessary changes: the Green Climate Fund was proposed as a $100 billion a year facility by 2020. Five years on, just $10 billion is firmly pledged. That sum is dwarfed by the scale of the funds that adaptation alone may need.
A United Nations Environment Programme report
, prepared with 19 leading institutions and research centres and released during the Lima conference, argued that even if efforts to keep global average temperature rises below 2 degrees C were to be successful, the cost to developing countries of adapting to droughts, floods, storms, and rising sea levels could reach $300 billion a year by 2050. At present, barely one tenth of that is on the table. If the 2-degree target is missed — and the emissions cuts promised so far do not come close — the costs will rise further. To meet the 2-degree target, the International Energy Agency has estimated
that the global energy sector alone will need an additional $1.1 trillion in low-carbon investments each year until 2050.
The $100 billion fund is important in the negotiation process as a potent symbol of good faith between rich and poor countries, but it is puny in comparison to global GDP. As some policy makers and analysts in Lima pointed out, moving the wider financial markets toward green investments would have much more impact than the climate fund itself.
“It is partly a problem of perception,” said Rachel Kyte, the World Bank Group vice president and special envoy for climate change. “It will be important to demonstrate in Paris next year that we are plugging the gap in the $100 billion fund. But it is also important to show what is happening outside that.”
The key, according to Kyte and others, is to get big institutional investors and pension funds to invest in sustainable growth, particularly renewable energy, and to get major companies, the industrial sector, and large cities to understand that climate risk is huge and that they must revise their strategies and address it.
Outside the Green Climate Fund, a long list of financial institutions — including pension funds, public procurement funds, public expenditure, foreign direct investment, multilateral development banks, bilateral development institutions, and domestic green funds, control trillions of dollars of finance. In 2013, annual global climate finance flows totaled approximately $331 billion, according to the Climate Policy Initiative’s annual report, Landscape 2014
. This was $28 billion less than in 2012 levels, though some of the drop was attributed to the falling cost of solar technologies.
Despite the decline, Kyte and others believe that a significant shift in thinking is underway. “There are some surprising initiatives,” she said. “ Rwanda, for instance, put $7 million into a domestic climate fund that has now grown to $50 million, which means that the country can start to finance its own green investments.” The larger challenge, as many analysts point out, is to move the priorities of major investors such as pension funds.
Most have been reluctant to move out of fossil fuels, or to invest proactively in climate friendly investments such as renewable energy, even where the institutions they serve are clear about the long-term risks of climate change. The leaders of the U.N., the World Bank and the International Monetary Fund, for instance, deliver regular, stark warnings about climate change, but their respective pension funds have so far remained silent on their fossil fuel exposure.
They are not the only institutions that show signs of a clash between declared policy objectives and the search for high returns on investment. Norway’s $850 billion sovereign wealth fund, the largest in the world, is derived from North Sea oil revenues. Earlier this year the fund’s board ruled against divesting its oil related holdings, despite both pressure from civil society and the Norwegian government’s progressive position on climate change. The fund has, however, blacklisted 40 companies that it considers too heavily involved in coal or palm oil on climate grounds, and promises to invest more in renewable energy in the future.
Elsewhere, there are signs that some financial institutions are beginning to respond to the climate risk by reducing investments in fossil fuels and other damaging sectors. In New York last September, the Portfolio Decarbonization Coalition (PDC), a group of investment institutions that included the Swedish pension fund, AP4, and other European pension funds, pledged to reduce the carbon footprint of $100 billion of investments in their portfolios by the end of 2014 and to decarbonize $500 billion of institutional investment in the longer term. Mats Anderssen, the CEO of AP4 and the head of Dutch Bank ASN, promised to make their investment portfolios completely carbon neutral by 2030 and have urged others to follow suit.
“Ban Ki-moon is working hard to raise the $100 billion for the Climate Fund,” Kyte noted. “But if the Korean Investment Corporation and Korean pension funds were to decarbonize their portfolios, it would have a much bigger impact.“ Governments could also do more: As a recent report from the UK’s Overseas Development Institute
pointed out, G20 countries continue to subsidize fossil fuel exploration to the tune of some $88 billion a year.
Rich country behavior was under scrutiny in Lima, but the largest unknown in the future of climate finance lies with China. China has declined to contribute to the Green Climate Fund; but last week in Lima, Xie Zhenhua, vice chair of China’s National Development and Reform Commission, announced that China was setting up a new South-South cooperation fund to help poor countries along the path of low carbon development. China has pledged $20 million a year to the fund for three years — a relatively modest contribution — but it has invited others to participate.
How much response there will be will depend on how China sets the rules and how transparent the management of the fund will be. U.N. officials praised the move, but other recent Chinese initiatives may be more indicative of where the bulk of China’s investments will go. This year alone, China has set up three new multilateral financial institutions: the New Development Bank, otherwise known as the BRICS Bank; the Silk Road Infrastructure Fund and the Asia Infrastructure Investment Bank. What rules China sets for these institutions and how much of their investments will be climate friendly could prove more decisive for the world’s climate.
Isabel Hilton, a London-based writer, broadcaster, and commentator, attended the U.N. climate talks in Lima. She is editor of www.chinadialogue.net, a Chinese-English website devoted to environment and climate change.