Climate change: a $7 trillion investment opportunity

Date

February 2018

Date

February 2018

With the forging of the historic Paris Agreement, the global finance sector turned its attention to climate change issues. The most far reaching development came with the report addressing climate risks issued by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) in 2016. Yet where there are risks, there are also opportunities. Today we see the sector focusing on the opportunities associated with climate change and its solutions. From the investment in clean technologies, to disruptive technologies – such as electric vehicles, batteries, Blockchain – to the transitional impacts on workforces, communities and broader societies. In this article we comment on the statements made at the recent World Economic Forum in Davos, the disruptive forces in motion and the implications for Australian business.

Davos highlights the challenges and business opportunities

At the World Economic Forum held at the end of January, the challenges of climate change were presented as an economic opportunity equating to AUD7.45 trillion[1] over the next two decades. Anand Mahindra, chairman of the Mahindra Group stated that “Climate change is the next century's biggest financial and business opportunity".[2] Mahindra, the $19 billion Indian conglomerate operates globally across a diverse range of sectors and is seeking to seize the business created.

Governments are also seeing climate change as an opportunity to reform their agenda. President Emmanuel Macron announced that France would shut all coal fired power stations by 2021. Macron is seeking to drive innovation, reinvigorate the economy and position France as an innovative and competitive country. Even though France only produces 1% of its electricity from coal based generation, what we see is a recognition of the geo-political economic opportunities associated with climate change issues. As President Macron stated, “I want to make France a model in the fight against climate change.[3]”

Also reported were statements from the head of insurance giant AXA, Thomas Burberl who declared that a global temperature increase in the order of 3-4 degrees “would not be insurable” and that the company would both divest from coal and no longer provide insurance to coal projects[4].

All eyes are on China with continued investment in clean technology, the introduction of carbon trading and its status as an economic powerhouse. For example, China is becoming the market leader in electric mobility[5]. Not only does the nation’s strategy support efforts to address local air quality issues it harnesses the country’s extensive, low cost manufacturing capability.

In Australia, we are seeing commitments across a range of sectors. Sanjeev Guptav’s investment in the Arrium steel works coincided with a commitment to invest $700m in renewable energy, batteries and pumped hyrdo storage[6]. This aligns with his controlling stake in renewable energy business Zen Energy signalling the convergence of heavy industry and renewables. Urban development is also seeking the advantage of renewable energy. Sekisui House’s Orchard Hills’ development in Sydney will generate over 1GWh of electricity for its residents[7]. This will effectively provide the residents of the estate with ‘free energy’.

What does this mean for business?

Increasingly capital is flowing towards investments aligned with the Paris Agreement’s two degree global warming objective. As clean energy technology costs fall, we see a confluence of commercial return and climate risk mitigation that provides businesses with a sweet spot. The commerciality of investments in renewable energy is clear and businesses are investing into renewable energy - regardless of domestic policy settings.

An immediate and effective step for businesses to take should be to align with the Paris Agreement and establish a science-based target. That is what Mahindra has committed to do as can be seen in his tweet copied below.

Figure 1: Anand Mahindra tweet

The development of science based targets provides a readily accessible measure for businesses and financiers to determine climate performance. When combined with the TCFD’s recommendations, businesses can disclose their climate related risks. Using this information, investors will be better informed to assess their investments and their risk profiles.

What does this mean for finance?

Beyond energy transitions, the opportunities are far more bespoke. Tomorrow’s business will be impact based. What does this mean? Increasingly businesses and corporations are aware of their broader roles within society, and are being held accountable for their actions. No longer are simple metrics suitable for the assessment of performance. The finance sector has recognised this and require a broader suite of analytics. In 2015, the United Nations Environment Programme Finance Initiative (UNEP FI) released its Positive Impact Manifesto[8] see below. The application of the Manifesto’s principles to date has been for investments from social housing to climate adaptation financing measures.

Greater transparency of investments and the articulation of their value to society, not only the financial returns, is expected. The challenge will be to do this in a robust, transparent and accessible manner. UNEP FI is continuing to work through these issues under the Positive Impact Investment initiative.

Principles of Positive Impact Investment

PRINCIPLE ONE Definition Positive Impact Finance is that which serves to finance Positive Impact Business. It is that which serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated. By virtue of this holistic appraisal of sustainability issues, Positive Impact Finance constitutes a direct response to the challenge of financing the Sustainable Development Goals (SDGs).

PRINCIPLE TWO Frameworks To promote the delivery of Positive Impact Finance, entities (financial or non financial) need adequate processes, methodologies, and tools, to identify and monitor the positive impact of the activities, projects, programmes, and/or entities to be financed or invested in.

PRINCIPLE THREE Transparency Entities (financial or non financial) providing Positive Impact Finance should provide transparency and disclosure on:

The activities, projects, programs, and/or entities financed considered Positive Impact, the intended positive impacts thereof (as per Principle 1);
The processes they have in place to determine eligibility, and to monitor and to verify impacts (as per Principle 2);
The impacts achieved by the activities, projects, programs, and/or entities financed (as per Principle 4).

PRINCIPLE FOUR Assessment The assessment of Positive Impact Finance delivered by entities (financial or non financial), should be based on the actual impacts achieved.[9]

Energetics can support the development of a comprehensive climate response that assesses the risks and ensures that the opportunities for your business are explored within the context of the expectations of the global finance community.