IIGCC BLOG

Looking towards New York on April 22

News in the past week or two that a small group of Pacific nations have moved to become the first countries to ratify the historic Paris climate agreement serves to highlight how it’s now just a month until the UN Secretary General hosts the formal signing ceremony in New York at the United Nations.

With this event on the horizon, the European Council has clearly signalled that it looks forward to signing the agreement. Moreover, it is also clear that the majority of European Member States expect and want not just to sign up promptly, but through this to become part of that first group of 55 signatory countries generating at least 55% of global emissions that is required to bring the Paris Agreement into legal force.

For this reason it is fair to expect a strong turn out from EU signatories in New York on April 22. Nevertheless, this does not ensure the Commission itself will be ready or willing to sign up the entire EU as one entity to the Agreement. Indeed, the Commission has made plain in recent weeks that it will only submit the EU’s entire instrument of accession once each and every Member State has deposited their own instrument of accession with the Commission – a condition likely to gift a significant amount of importance upon those EU member countries that may not wish to do this rapidly.

In particular, the intent and conduct of Poland is being closely watched, since it has already stated openly that it plans to delay any move to accede to the Paris Agreement until it has seen the outcome of EU decision-making about effort sharing over GHG contributions/reductions made outside the EU emissions trading scheme.

Other delays may also hamper progress in April. For instance, India has already signalled that it will probably only sign the Paris Agreement after the next round of climate negotiations in Marrakech – once detailed decisions around implementation and climate finance have been sorted out and formally adopted.
After their recent collaboration to address some key climate challenges within their own region, one must hope the Americans and the Canadians will be swift to sign and prompt to accede.

China also seems unlikely to prevaricate over signing the agreement, though how long it takes to ratify is less clear and may depend on how much progress it makes in reference to the climate goals set out recently in its latest five year economic plan.

Revision of two EU directives on energy efficiency offer a hot opportunity for climate action

Tatiana Bosteels, Head of Responsible Investment at Hermes and chair of IIGCC’s property working group

Just a year ago the Energy Efficiency Finance Institutions Group report - published by a group of fellow investors and DG energy – set clear recommendations on how to scale up finance and put in place the measures public and private actors needed to see put in place. Now, in our latest policy paper – Transforming the sustainability of Europe’s building stock - published on 11 March, IIGCC members are calling on EU policy makers to capture the opportunities offered by the revision of the EU’s policy framework to match and fit the needs of the market.

With a review and negotiations taking place to update both the Energy Performance in Buildings (EPBD) and the Energy Efficiency (EED) directives, the next 6 months will be crucial for setting tougher European policy goals and frameworks in these important policy areas.

To enable investors to scale up their energy efficiency and green buildings investments to the level required by the 2030 climate targets, will require a stronger focus on these two particular themes. To that end, we support a stand-alone Communication on Energy Efficiency showcasing the multiple benefits and the investment opportunities for the EU, which is expected early in the autumn to feed into this process.

In particular, IIGCC argues it is now time – and in keeping with the goals embedded in the Paris Agreement - to set a binding long-term goal to bring the entire European buildings sector to a nearly-zero energy standard by 2050. Given that less than 2% of European buildings are replaced every year, the focus must be on continuous energy efficiency performance through operational and refurbishment of our existing building stock.

IIGCC believes this can be achieved in two main ways through revisions to both EPBD and EDD:

With regard to the application of building standards to a larger number of public and commercial building’s refurbishments under the EPBD, we believe a comply-or-explain approach should be taken where either energy efficiency improvements are made at refurbishment, or an alternative plan must be proposed. Equally, given the technological progress in IT and building design IIGCC argues it’s also time to strengthen the quality and effectiveness of Energy Performance Certificates so they become dynamic electronic tools that hold data on both the design and operational performance of assets that can be used for modelling to inform the most sustainable refurbishment processes.

With regards to EED, the review process should ensure the continuation of energy obligations beyond 2020 and impose a requirement to increase energy obligations beyond the current level of 1.5% annual improvement in energy efficiency compared to total energy sales.

Clearly, some funding will have to be found through leveraging private monies via effective financial instruments and the right regulatory framework. However, public monies will also be important, especially if the EU is to continue to mainstream climate action beyond 2020 and to a higher ambition level of around 20%.

Set against the backdrop of wider discussions about the EU’s 2030 climate and energy targets and effort-sharing agreements, IIGCC members are pleased to see growing interest in energy efficiency and green buildings. We particularly welcome the ambition of the European Commission to integrate these regulations under the umbrella of the Energy Union as part of broader efforts to achieve EU energy security and deliver on its climate targets. We look forward to seeing the crucial role of energy efficiency and green buildings fully recognised in the State of the Energy Union package when that is released later this year.

At the annual investment conference of the Pensions and Lifetime Savings Association (formerly the NAPF) held on 10 March in Edinburgh, IIGCC’s Chairman Donald MacDonald addressed a full plenary on the topic of the climate challenge: investing for tomorrow’s pensioners.

Before Donald spoke UNFCCC Executive Secretary, Christiana Figueres, delivered a strong reminder that 189 governments had finally sent the signal that they would take steps to address climate change by signing the Paris Agreement.

Donald then told the audience that all pension funds, as fiduciaries, can no longer ignore scientific advice (on climate change) in the same way as they would not ignore financial regulation. He went on to list five reasons that consideration of climate change risks and opportunities must now be considered as part of any investment fund trustee’s fiduciary duty:

1. Virtually every government now accepts the science of climate change – something hardly surprising given how with every passing month the impact of regional and global climate becomes increasingly self-evident.

2. The implementation of Intended Nationally Determined Contributions or INDC’s will have clear consequences for pension and insurance regulation

3. Significant amounts of private capital will need to be mobilised in order to deliver each country’s national climate plan

4. The investment community needs to do far more now and in the future to measure, monitor and report on carbon and carbon emissions

5. Funds will find themselves exposed to much greater stakeholder and broader social pressures to disclose how they are dealing with the issue of climate change.

As Donald also made plain, there would going forward be no hiding place for pension funds . Moreover, this change is not driven by belief systems but by financial reality. He also suggested that for smaller funds collaboration was a good way to access the research and engagement opportunities that large funds may have in-house and that they should also expect more from their advisors. Above all, asset owners and fund managers have a unique opportunity to make investment decisions that are right for their beneficiaries and a crucial step towards a low carbon economy.

Shortly after the gavel came down on the Paris Agreement, UNFCCC’s visionary Executive Secretary Christiana Figueres acknowledged that action taken by investors to address the climate challenge - alongside those of businesses, cities and regions – had been one of the key reasons for progress at COP21.

Just over a month later– and a short 16 months after he first asked investors to make concrete climate commitments – Ban Ki Moon challenged 500 institutional investors attending a summit at the UN (organised by Ceres), to double their investments in clean energy by 2020.

Figueres meanwhile reminded the same audience that most if not all of the decisions investors make over the next five years have the potential to transform the global economy and energy system by 2050 and, through this, the quality of life for everyone else for centuries to come.

Having secured an unequivocal signal for investors in the Paris Agreement that the transition to a low carbon global economy is irreversible, the focus in 2016 is shifting rapidly towards implementation through policy change and investment solutions.

Heralding that shift, in early February IIGCC and its partners published a framework for sustainable real estate investment

to help investors and others integrate climate change issues into their decision-making processes. In the same week IIGCC also made an opening presentation at the first meeting of the FSB’s climate disclosure task force, opening a dialogue through which we hope to contribute directly to the work of this body.

This week IIGCC kicked off a new phase of EU policy engagement when a delegation of our members from five European countries visited Brussels to meet senior Commission representatives (including Commissioner Cañete and the cabinet of President Juncker). Various topical issues were discussed, including NOx and CO₂ emissions from transport, the transformation of Europe’s building stock and decarbonisation of the electricity sector. The EU is about to define the legislative framework for large sectors of the EU economy, including the automotive, energy intensive and utility sectors. IIGCC will be working hard over the coming months to ensure this framework defines an ambitious floor for even more stringent action in the years to come.

Next week IIGCC convenes another important dialogue - on the fiduciary imperatives arising from climate risk - with pension trustees and their advisors at the UK annual conference of the recently renamed Pensions and Lifetime Savings Association (PLSA) taking place in Edinburgh.

Harnessing some of the momentum generated by co-sponsoring both the Global Investor Statement on Climate Change and two highly successful side events at COP21 (see previous blogs), IIGCC will also continue to work closely in 2016 with other investor networks and groups in Australasia and North America, particularly on efforts to drive better stress testing and disclosure by fossil fuel companies and other investor led solutions that will help drive an orderly transition to a low carbon economy.

As all of this suggests, Paris was indeed just the beginning.

Historic Paris climate agreement delivers every investor ask

On December 12th, the eyes of the world were upon the French Foreign Minister Fabius as he gavelled through what’s been hailed widely as a historic agreement. This event showed that governments of all stripes can – despite the many crises facing the world community – work together effectively to deliver a robust response to common risks. It also sends an unequivocal and enduring signal to investors that the era of unabated fossil fuel usage will end in the second half of this century.

What did we win?

The accord - the first universal climate agreement in history, requiring efforts by all kinds of countries - incorporates every key investor ask that IIGCC brought to the COP:

-We had asked for a high ambition level – and governments tightened the overall objective by making reference to a 1.5 degrees temperature goal - a valuable long term signal for investors and a crucial ask for small island developing states who led the high ambition coalition formed with the EU, US, Canada and key emerging countries such as Mexico and Brazil.

-A reference to the objective of balancing GHG emissions and their removal, i.e. to realise net zero emissions, in the second half of this century – a key investor ask ahead of the COP and throughout the negotiations.

-An ambition mechanism whereby from 2020 onwards countries update their nationally determined contributions every five years- something that will prevent a locking in of ambition levels whilst technologies mature further. Countries will start a dialogue about their next round of INDCs in 2017. Governments agreed that each subsequent INDC would be a progression from previous efforts, i.e. that ambition will only be strengthened and countries will not backtrack on prior commitments.

Countries are invited to come forward with 2050 low-emissions development strategies in line with the long-term goals – providing crucial information for investors ON emissions pathways on a country by country level.

-Countries agreed a climate finance goal of USD 100 bn by 2020 that will also serve as a floor from then onwards, indicating that funding levels will continue to rise.

-Contrary to what some press coverage may claim the agreement is in part legally binding. The most important provisions, including the global long-term goals, are in the legally binding agreement not the politically binding decision.

The agreement will be signed by world leaders in April 2016 during a UN summit and remain open for signature for a few months after that. It will be ratified in most countries; in others (such as the US) it can be signed through by presidential decree. There will be a further implementation summit later in 2016 and the entire Paris Agreement will be reviewed in 2023, to ensure it remains relevant. However, whilst the national climate plans are not legally binding, they show the extent of political will – which has enabled them to be submitted at a higher ambition level and with broader participation than any legally binding structure would have allowed.

Investors should pay more attention to this political will that the Paris Agreement represents than to its legal form. Before coming to Paris, governments undertook extensive domestic consultation and sought cross-government support for the actions that flow from it. The no-backtracking provision underscores that every country will take escalating action to reign in emissions.

Going forward the reference to a 1.5 degrees objective will require a step change in ambition levels. Most developed countries such as the US and the EU have so far planned their mitigation efforts by reference to a 2 degree pathway. They must now analyse the policy implications required to carve a cost-effective pathway to 1.5 degrees, and take earlier, more ambitious action to deliver on this goal. Emerging countries will also need to peak their emissions sooner and more aggressively reduce their emissions from then onwards.

The dialogue on INDCs in 2017 will be another crucial point but the next major political moment will occur in 2020, when new INDCs are collected for the 2030 horizon ahead of a global ‘stocktake’ on progress made under the agreement that is scheduled (in the text of the agreement) for 2023.

More immediately, IIGCC will discuss with EU policy-makers what it would take to deliver a response in line with 1.5 degrees. The entire European Union climate policy framework may need to be revised, with major ramifications for utility companies, the transport sector and agriculture, not to mention fossil fuel companies. The 2030 framework is not set in the stone precisely because the EU opted to wait for the Paris conference before adopting any legislation. The door to an increase of ambition is open.

For investors the long-term goals established by this agreement send the clearest possible signal about the direction of travel over the short, medium and longer-term. Much will depend on how implementation unfolds at a national level, but it’s clear that governments will now be engaged in a race for the top to continuously raise their ambition level.

IIGCC will provide a more comprehensive post-COP briefing in the next few days.