The key elements of the international agreement from the COP21
Adapt business models and reduce emissions
Financial consequences of fossil fuel asset devaluations
Since the New York summit in October 2014, investors have been mobilising in their droves in support of climate change.
More than 700 investors have made an engagement of one kind or another. Some of them, like AXA and the Norwegian pension fund, are among the largest in the world.
The two main factors driving this mobilisation are the carbon risk hanging over fossil fuels and the increasing pressure from civil society, which wants to see fossil fuels replaced by renewable energies. In France, it is notably the provisions of article 173 of the TEE law that encourage institutional investors to calculate their carbon footprint and, from the end of 2016, to communicate the methods that have been put in place to contribute to the energy and ecological transition.
Asset owners have four main climate strategies they can use either individually or in combination: divestment, shareholder engagement, green financing, and portfolio decarbonisation.
For more than a year now, Novethic has been analysing and quantifying the move to incorporate the climate into financial management, and has prepared four quick guides to ending coal investments, green financing, carbon risk and climate commitments of the systemic banks and insurance companies.Novethic: the four useful tools on finance and climate change
Since the start of 2015, the Novethic research centre has been monitoring how investors are mobilising in support of climate change. Following the impetus provided by Cop 21, 2016 will be about focussing on translating commitments into action.
This study lists the responsible investors engaged in the fight against climate change. It reviews the practices of 960 financial players around the world and describes the multiple strategies available, such as divestment from fossil fuels, as foundations and ethical investors are doing, and shareholder engagement at oil companies, an approach used by large pension funds.Climate: Investors Take Action - November 2015 Update September 2015 Update February 2015 Update
They fall into two main categories. First, there are ethical investors, who refuse to invest in coal or in companies that are big GHG emitters. They also exclude arms, tobacco and gambling from their portfolios. The second category is long-term investors like pension funds and insurance companies, which want to limit their exposure to carbon risk, that is, a substantial depreciation of the market value of companies that are large GHG emitters. There are more than 1000 such investors around the world. The movement is particularly strong in the United States and Northern Europe.
Divestment involves excluding sectors or companies that are high polluters, such as coal and tar sands, from investments. Environmental NGOs are running numerous campaigns targeting banks, foundations, major universities and pension funds to try to force them to sell their stock (for example, stocks in the 200 companies ranked by the Go Fossil Free movement as the worst polluters on the planet) and reinvest their capital in financing renewable energy.
This involves measuring the carbon emissions generated indirectly by the various financial management techniques. This practice is becoming widespread, notably in northern Europe. To calculate the carbon footprint, we "weigh" the carbon emissions of a portfolio based on the emissions that are generated by the companies and the number of stocks held in the portfolio. This calculation method can be adapted to bonds or other types of investments, such as real estate. In concrete terms, when an investor holds stocks in oil companies or finances coal-fired power stations, he is contributing more to greenhouse gas emissions than if he invests in green activities.
Once investors have determined their carbon footprint and identified the companies in their portfolio that emit the most carbon, they can adopt strategies to decrease the quantity of these indirect emissions. If they do not want to totally exclude certain sectors, they can invest in the companies with the lowest emissions and limit their holdings in high emitters. In response to this specific need of investors, index providers have developed low-carbon market indices.
Shareholders can use their rights, often as part of an alliance, to persuade the companies with the largest carbon footprints, and who primarily use fossil fuels, to change their business models. This type of activism proved spectacularly effective in the spring of 2015, when virtually all of BP and Shell's shareholders demanded that the two companies come up with a strategy that would be both resilient to climate change and drastically reduce their GHG emissions.
When investors decide to finance the transition to a green economy, they put their money in activities that have measurable environmental benefits. These may involve infrastructures for renewable energies like wind or solar farms, green bonds (i.e. bonds issued by companies, international organisations or local governments to finance a project or business that will have a positive environmental impact).