What comes after a climate agreement?

In December 2015 something remarkable happened. Some 195 countries agreed to a global deal to fight climate change. Given how clear the danger of climate change is to our way of life, some think that a global agreement is not so remarkable. But climate discussions began 23 years ago, and this is the first time all the world’s nations have signed up to such a treaty. 

The agreement was reached during one of France’s hottest winters on record. In fact, three of the hottest years in its history have taken place after 2010. In the first eight months of 2015, the world saw more than 120 climate-related disasters, suggesting that if ever there was a sense of urgency for change, it is now.  

But let us not be naïve, say cynics, this treaty alone will not fix our climate. Countries have committed to a goal that our climate should be kept well within two degrees of warming. But experts say they have not yet made adequate individual promises to get us there, still less agreed a sanction mechanism if those promises are broken. So the deal is a step in the right direction with the added force of media scrutiny from a very public promise. But alone, it won’t solve the problem.

“The negotiators knew that,” says David Pitt-Watson, chair of the UNEP Finance Initiative (UNEP FI) and Executive Fellow at London Business School. “But they figured that it was neither politically possible, nor practically sensible to believe that in an uncertain economy, with dramatic changes in technology, they could prescribe how over the next generation, almost 200 countries must transition to clean energy use.”

Instead, in Paris, the countries positioned a stepping stone, a strong message of global intent to address this pressing problem. And it was not just a government commitment, it was a challenge to the entire world’s decision-takers.  

Every country agreed to a carbon reduction plan (Intended Nationally Determined Contributions – INDCs) and rich countries agreed to help poorer ones by providing US$100 billion a year to ensure they follow a development path which does not rely on fossil fuels. 

Campaigners, scientists, engineers, and above all, financiers and business people all lent their voice, and their commitments. Pitt-Watson says, “Anyone attending the conference would have been struck by how much activity was taking place outside the negotiation hall. It felt more like the coming together of movement, than a room full of negotiators.”

Clean Trillion

In light of the movement, both the challenge and opportunity for finance is vast. Pitt-Watson says: “Huge investments will be needed to create a sustainable world. Estimates vary, but the investor group Ceres called for a ‘Clean Trillion’ or US$1 trillion every year between now and 2050 – most of which will have to come from the private sector.

“So we need to focus on the efficacy of the finance industry in helping channel people’s savings into investments that will generate both short-term returns and long-term sustainability.” 

Pitt-Watson argues that development cannot take place unless the finance industry does its job. “If we are to create a sustainable and prosperous world, we need to find the Clean Trillion. Investors need to change the behaviour of the companies in which they hold shares, they need to find new mechanisms to get resources to where they are needed. That is the biggest challenge for finance.”

And at Paris the finance industry was noticeably leading the call for action.

The largest investors, insurance and pension funds in the world urged governments at the 2015 conference to:

1. Develop plans to phase out subsidies for fossil fuels and provide stable, reliable and economically meaningful carbon pricing that helps redirect investment

According to a report from the International Institute for Sustainable Development and the Nordic Council of Ministers, if 20 major countries abandoned their subsidies, global carbon dioxide emissions in those countries would reduce by up to 11 per cent by 2020. If 30 per cent of those funds were reinvested in clean energy, then emissions could drop by18 per cent. 

“It seems extraordinary,” says Pitt-Watson, “but many countries, including our own, subsidise the very energy sources that cause so much damage”. 

Investors worth US$25 trillion signed a petition to this effect. And they were joined by Royal Dutch Shell, Unilever, the World Bank and others in asking policymakers worldwide to put a clear price on carbon emissions in order to contain global warming.

A cost-effective policy framework is essential for the investment needed to deliver greenhouse gas emission reductions. “Ideally, a carbon tax or pricing system should be used to account for the costs of fossil fuel pollution,” says Pitt-Watson. “And eventually, it will come. Roughly 50 per cent of the world’s GDP is already covered by some form of carbon pricing, and investors say they are happy to pay a price for it, to create a level playing field, and therefore make sustainable investment relatively more attractive.” 

2. Strengthen support for energy efficiency and renewable energy

The agreed temperature targets will be impossible to achieve unless new technologies are developed and prioritised. 

The World Bank’s ‘Turn Down the Heat’ report by the Potsdam Institute for Climate Impact Research shows global warming of close to 1.5°C above pre-industrial times is already locked into Earth’s atmospheric system by past and predicted greenhouse gas emissions. So it looks like we're headed for 1.5°C of warming based on a best-case scenario basis. But Pitt-Watson says the promise of new technologies is very encouraging. The cost of solar power, for example, has plummeted in the last fifteen years. Similar development, often difficult to predict, can transform other parts of the energy system. The funding and opportunity to scale those technologies is a huge opportunity for business, entrepreneurship, and of course for finance. Yet, it is also a threat if the issue is ignored.

“Finance institutions have not suddenly become green activists. They are simply saying that unless the climate is stable, the world economy in which they invest is at risk. Those who think sustainability hinders economic growth in the long term are misunderstanding the nature of the issue,” says Pitt-Watson. “Without sustainability, there can be no economic growth.”