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Trillions of dollars at risk for investors from climate change

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Here is a trillion dollar question: How will the portfolios of long-term asset managers like pension funds, foundations and endowments be affected by climate change? These institutions, in contrast to commercial banks, are legally obligated to take a long-term view in managing their returns. A new report by Mercer, a leading consulting and investment services firm, provides the first look at yet another window on the complex consequences of climate change—the implications for strategic asset allocation. 

 

A headline result of the study is the estimated increase of up to 10 % in overall portfolio risk, primarily due to policy uncertainty—equivalent to as much as US$8 trillion by 2030. Traditional equity and bond holdings—usually the most conservative forms of hedging against uncertainty –- are most at risk of underperformance.  In contrast, carefully selected investments in climate- sensitive sectors may actually reduce overall portfolio risk. 

 

The International Finance Corporation (IFC) and UK’s Carbon Trust, along with 14 institutional investors collectively managing over US$2 trillion, funded the analysis, which was carried out by Mercer. The analysis looks at impacts by sector, region, and asset category (bonds, private equity, real estate, etc.) and builds on a set of climate change scenarios out to 2030 developed by the Grantham Research Institute at the London School of Economics and the consulting firm Vivid Economics. 

Are buildings an important piece of the climate puzzle?

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They inhabit two different worlds—buildings and climate change—both outside and within the World Bank. It should not be that way as the building sector could be central to both mitigation and adaptation efforts.  

 

Buildings are important for climate mitigation because they account for about 30% of global energy consumption and greenhouse gas emissions. According to the International Energy agency (IEA), energy use in this sector is expected to increase globally about 30 % over the next two decades if recent trends continue; however, the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report concludes buildings offer by far the largest potential source for low cost reductions in CO2 emissions. The World Bank has many projects and analyses addressing this opportunity including a recent ESMAP (Energy Sector Management Assistance Program) report on the benefits and obstacles to effective building codes. These could address over 60 % of building energy use but remain weak and often unenforced in most Bank client countries.

Lessons from the Montreal Protocol for Climate Finance

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The recent talks in Tianjin, Washington DC and Addis Ababa show that there is serious thought being given to making good the promises on climate finance in Copenhagen (read related blog post by Andrew Steer).

 

I believe that the Montreal Protocol has some lessons to offer for tackling climate change: It is an international agreement that addresses stratospheric ozone depletion and is widely viewed as the most successful response to a global environmental problem to date. One common feature of the ozone and climate conventions is the provision of financial resources to help developing countries pay for the higher costs of measures with global environmental benefits. This topic is high on the agenda for the Cancun climate meeting in December, and is being specifically addressed by a high-level UN Advisory Group on Climate Finance that met last week in Addis Ababa.

 

Since the signing of the Copenhagen Accord last December, much attention has focused on the issue of resource mobilization and specifically how to generate the US$100 billion a year for climate finance promised by 2020. Numerous studies have also been published estimating total costs for developing country mitigation and adaptation requirements─they usually conclude that the needs are in the many billions of dollars.

Russian wildfires: No winners from climate change

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A commonly heard comment in climate change discussions has been that the benefits of climate change – milder winters, increased agricultural productivity -- also have to be acknowledged. Russia and Canada, it has often been argued, could be economic “winners” from climate change due to easier access to ocean shipping routes, longer growing seasons, and the space and water necessary to increase agricultural production. A 2008 report of the U.S. National Intelligence Council notes that Russia “has the potential to gain the most from increasingly temperate weather”, citing easier access to Siberian energy reserves and an Arctic waterway. This idea was popular with some Russian scientists and politicians, who as recently as the past year questioned whether reductions in greenhouse gas emissions were necessary.

 

While consideration of benefits is appropriately included in economic studies of climate change, the recent heat waves and wildfires in Russia illustrate the limitations in thinking this way. The July heat wave – the worst in the
130 year record -- brought Moscow temperatures in excess of 100 degrees, destroyed crops on an estimated 25 million acres (about the size of Iceland), and led to intense fires across the country wiping out entire villages. Burning peat fields darkened the skies and filled the air with high levels of pollution. Breathing the outside air for an hour in Moscow is now reported to be equivalent to smoking two packs of cigarettes. In response to this, and other climate-related production declines in the EU and Canada, grain prices have risen 90 %. In order to protect domestic markets, Russia has banned grain exports.

Can Corporations Lead When Governments Don’t?

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The past week saw the final demise of proposals for U.S. legislation to address climate change, and a sense of gloom pervades discussion about prospects for a similar effort by the new Congress next year. Among major corporations, however, one can still find many examples of impressive environmental initiatives and investments. The same week, for example, General Motors (GM) announced two costly steps predicated on consumer demand or regulatory pressure for environmental performance. The more highly publicized news was that GM would begin accepting orders for its long awaited hybrid electric car, the Volt. The Company attracted less fanfare for another product with more immediate environmental benefits, the introduction of a new climate friendly refrigerant for auto air conditioning – replacing a chemical with a global warming potential (GWP) of 1400 with one that has a GWP of 4, a 99.7% improvement over current emissions. (It is worth noting that auto air conditioning has become so popular that its one of the only features available as an add-on to the Nano in India).

 

 In June, General Electric announced that the performance of its “eco-imagination” initiative, a commitment to develop and market a growing range of green products, was meeting revenue targets and outperforming revenue growth in the company as a whole. Consequently, the company plans to double its investment in the initiative over the next five years.

Reflections from Punta del Este: My 15-plus years in the GEF Family

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I first engaged with the Global Environment Facility (GEF) in 1994 as part of the evaluation team for the GEF pilot phase― a US$1 billion pilot hosted by the World Bank that began in 1991, prior to the Rio Earth Summit. In May, along with a small group of World Bank colleagues, I found myself at the Fourth GEF Assembly in Punta del Este, Uruguay. In reflecting back over the intervening time period I find nuggets of success, but also much remains disturbingly unchanged.

 The single overwhelming cause for celebration has been the announcement―dramatically achieved only a few weeks ago―of a GEF replenishment of more than 50% to US$4.2 billion (US$3.5 billion in new funding). Any increase is obviously welcomed in a period of fiscal austerity, and most government representatives understandably expressed congratulations. However, a few couldn’t help but note that the increase was disturbingly small if measured by the increase in the range of problems to be addressed. There is a much greater sense of urgency (especially with respect to climate change), and many more agencies involved in channeling funds (originally only the World Bank, the UN Development Programme (UNDP), and the UN Environment Programme (UNEP), and now there are more than 10).

Reflections on my final day in Copenhagen

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  • The number and diversity of countries participating in the convention process may simply be unmanageable. 
     
  • The increasing focus on climate change may have come at the expense of other important concerns. A commonly heard statement is that climate change is “sucking the air” out of everything else. Thus the amazing range of interest groups attempting to label themselves as climate victims or solutions, from groups based on gender, religion, diet, geography, etc.
     
  • The media was incredibly frustrated by the complexity of the issues and lack of transparency in the meetings. The process does not lend itself to simple headlines. Consequently the focus on good visual events – especially demonstrations and police activity – seemed totally disproportionate to anything observed.
     
  • No matter how many times I’ve done climate meetings, I always forget how exhausting they become and how good it feels to be going home!
Polar Bear spokesman delivers climate message, Copenhagen. Photo ©Alan Miller/ IFC Media frenzy when police move student demonstrators inside Bella Center. Photo ©Alan Miller/ IFC

 

Postcard from Copenhagen

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Disappearing polar bear: climate change art work, Copenhagen. Photo ©Alan Miller/ IFC

Having attended all but two of the 15 climate change conferences, I am pretty familiar with the atmosphere, processes, and even many of the attendees.  Nevertheless, much about the Copenhagen Conference has been surprising -- the sheer number and diversity of participants, the large street protests, the media attention, the impressive engagement from the people and city of Copenhagen.  The best comparison I can make is to imagine taking the United Nations, Times Square, and Greenwich Village and put them all together under one roof. 







At the core, at most a few hundred negotiators, often sitting behind closed doors, undertake the difficult task of attempting to reach an agreement.  It is no exaggeration to say that what they do -- or fail to do -- may determine the fate of us all. Swirling all around them are thousands of people from every imaginable (and unimaginable) perspective, traditional environmental groups, indigenous peoples, business organizations, religious and spiritual believers, the media (press interviews pop up randomly in the halls) and of course the international organizations. 

Hopenhagen: central square filled with climate change activities, Copenhagen. Photo ©Alan Miller/IFC

Those of us from IFC (three or four this week) are a small part of the World Bank Group delegation, which numbers more than fifty; the World Bank is in turn only one of many international organizations. World Bank President Zoellick arrives today -- it will be interesting to see his role and impact.

As the senior political level officials enter this week, the process seems to be reaching a breaking point with four days still to go. The registration lines are slowing to a crawl and observer organizations have been told to reduce their numbers by half or more due to the capacity limits of the building (actually, multiple buildings several of which are temporary). Every day the few members of our delegation actually observing the negotiations report little or no progress. Yesterday they were told to leave when the meetings entered the sensitive "informal" stage. 

President  Robert Zoellick (World Bank) with President Mohamed Nasheed (Maldives). Photo ©Alan Miller/IFC


The ultimate hope for a positive outcome remains pending the arrival of an expected 110 plus heads of state.  As the Convention Executive Secretary Yvo de Boer told us in a briefing last week, "they come to celebrate, not to commiserate."  As of today it's difficult to believe that heads of state can do in two days what their ministers and staff have been unable to do in months of meetings. 

We'll all know soon.

  

Getting on a technology pathway to avoid dangerous climate change

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   An IFC investment helps provide clean, affordable water to underserved communities in developing countries.

Many of the measures proposed in the World Development Report (WDR) 2010 will require substantial engagement with the private sector. The UN Framework Convention on Climate Change has estimated that more than 80 percent of the investment required for climate change mitigation and adaptation will have to be privately financed. For this to happen, the key requirement will be meaningful targets and supportive public policies.

One area in which private initiative will be critical is in the development and dissemination of new climate friendly technology. As the advance edition of the WDR states, "Technological innovation and its associated institutional adjustments are key to managing climate change at reasonable cost. . . . Mobilizing technology and fostering innovation on an adequate scale will require that countries not only cooperate and pool their resources but also craft domestic policies that promote a supportive knowledge infrastructure and business environment."

For several reasons, an increased focus on accelerating new technology is urgently needed.

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