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Mind the gap

1 October 2015 By Antony Currie

Mark Carney has hit a potential sustainable-finance goldmine. There has been plenty of talk of late about what needs to be done. The United Nations last weekend adopted 17 development goals – most of which deal with environmental issues. The United States and China signed a climate pact and even Pope Francis has chipped in with his views. What’s lacking, though, is a way to provide the necessary funds. The governor of the Bank of England may have one promising approach.

In a speech at Lloyd’s of London on Tuesday evening, Carney said the Financial Stability Board, which he chairs, is considering recommending to the G20 that “more be done to develop consistent, comparable, reliable and clear disclosure around the carbon intensity of different assets.” Such information could make “climate policy a bit more like monetary policy.”

Granted, it hardly sounds exciting or groundbreaking, especially compared with, say, the China-U.S. climate pact announced last week. It’s not so much President Xi Jinping’s pledge to set up a domestic carbon-trading scheme by 2017 that makes the agreement important. The direct effect of that plan is unclear, and such cap-and-trade schemes have a checkered history.

The significance is more that the two countries, which together account for about two-fifths of the world’s CO2 emissions, have at last found some common ground on environmental issues. That bodes well for December’s U.N. conference on climate change in Paris, which will focus on some of the sustainable-development goals agreed to last weekend in New York.

There’s still the question of financing. All in, as much as $4 trillion a year may be needed to meet the 17 U.N. sustainable-development goals, which cover everything from climate change to deforestation to gender equality. There’s currently as much as a $2.5 trillion annual shortfall in funding, according to UBS.

Private money could, in theory, fill the gap with the $300 trillion in global capital markets, according to UK insurer and asset manager Aviva. The trick is convincing those who control it to devote more to sustainable development, whether by allocating capital to new projects or forcing existing companies to clean up their act.

The latter effort has already started, as some shareholders are taking a more activist stance on climate. They have pushed energy companies like Royal Dutch Shell and BP to provide more information on how climate change might affect their earnings. And they have persuaded agribusinesses like Bunge to adopt a zero deforestation policy.

There are a number of companies and groups that specialize in pushing companies for better information on environmental risks. CDP, for example, gathers data from at least 4,500 firms on behalf of more than 800 investors representing some $95 trillion of assets. The United Nations has persuaded 1,395 investors and asset owners to sign its Principles for Responsible Investment.

The problem is that these efforts are voluntary – and many signatories may be in it just for show. UBS, for example, reckons just $100 billion of assets is devoted to activism on sustainable development.

That’s where Carney’s idea on measuring carbon risk comes in. He envisions a more comprehensive, standardized approach than currently available for companies within the G20, whose member states, he points out, “account for 85 percent of global (carbon) emissions.”

Such a wealth of information “will expose the likely future cost of doing business, paying for emissions, changing processes to avoid those charges, and tighter regulation,’ Carney argues. Because such costs are likely to have an impact beyond many investors’ time frames, which he pegs at around 10 years, it ought to force owners to pay more attention to them – and allocate capital accordingly.

There’s no reason to limit such government-mandated disclosure standards to just carbon emissions. Applying them to a broader set of environmental risks would give investors a far better picture of the costs of climate change. They would also have far more incentive to assess the upside of funding sustainable development.

 

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