Q&A with Christiana Figueres on sustainability - Rethink Responsible Capital

responsible capital

Q&A with Christiana Figueres on sustainability - Rethink Responsible Capital

In 2010 Christiana Figueres  took on what many considered would be an impossible task. As the former Executive Secretary of the UN Framework for Convention on Climate Change (UNFCCC) she was responsible for leading the world towards a global agreement on tackling climate change. On 12 December 2015, after injecting what Figueres calls ‘transformational optimism’ to change the tone of conversation from confrontation to collaboration, 195 countries signed the Paris Agreement. In doing so, they unanimously agreed to: limit the increase in global temperatures to less than 2°C (ideally 1.5°C) above pre-industrial levels to reduce the risks and impacts of climate change; to increase climate resilience and adaptation; and align the flow of capital with low greenhouse-gas emissions and climate-resilient development.

COP21 marked a significant turning point in the global governmental and regulatory policy agenda towards intentionally changing the course of the global economy to protect the most vulnerable, and improve the lives of all. The consequences of this are profound for companies and capital markets alike. Companies will need to adapt to this new policy paradigm to remain sustainable as the low-carbon transition takes place. 
 

Investors, in turn, have to consider the risks and opportunities a policy shift on this scale creates for their portfolio assets, and play their part in directing the flow of capital towards the companies whose business practices are most closely aligned with the goals of the Paris Agreement.


Just over two years after the Paris Accord was signed, 174 countries representing 88% of global emissions have already ratified the agreement, which has come into effect well ahead of schedule. Regulatory regimes have already started to reflect this new paradigm, but there is a lot of work still to be done. However, the pace of change is unlikely to slow. The impossible has become unstoppable.


Getting 195 countries to agree to tackle climate change through the Paris Agreement was a turning point in the global policy agenda. What was the hardest part in achieving that agreement, and what is the main obstacle that remains in place?

The most daunting challenge was to turn the incumbent argument that addressing climate is only a burden, into the more updated realisation that actually decarbonisation is very much to our advantage. Decarbonisation takes us to more efficient generation, distribution and use of electricity, utimately lowering the cost of production across the board.  Decarbonisation means cleaning the air in particular in cities, thereby improving public health.  Decarbonisation means moving to more sustainable use of our land, increasing crop yield and improving  food security.  

While it is evident that some business models will be losers, it does not follow that the industries that use those business models will be losers.  In fact, everyone can benefit from decarbonisation provided the shift to alternatives is done soon enough to avoid stranded assets.  

The main remaining challenge is acceleration. There is no doubt that the decarbonisation of the global economy is underway, is unstoppable and is irreversible. What is not yet decided is how fast it will occur.  While the forces of the market are moving us in the right direction, we are challenged by having to ensure that global greenhouse gas emissions begin to descend as of 2020. It is possible, but only with focused intentionality.
 

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The impact of climate change on the global economy and financial markets is often not very well understood. How would you explain the link to a layman?

There are two impacts of climate change on the global economy, one negative and one positive. The first impact is the one we have been suffering for years, expressed in the growing cost of damage/destruction of infrastructure due to increasing frequency and intensity of extreme weather events all over the world. The positive impact is that which we derive from addressing climate change in a timely fashion. That shift would bring us more jobs, cheaper and cleaner energy, cleaner air, and more reliable food production. 

Financial markets will suffer similar negative and positive impacts. The burden of reconstruction and vulnerability is already bringing higher volatility and huge losses of value across asset classes. Asset owners and managers have already realised this and are starting to decarbonise their investment portfolios.
 

On the positive side of things, there is already empirical evidence that supports that low carbon investments provide a better risk-return ratio 


Investing in the clean economy is not only the right thing to do, it is the wise thing to do from a financial perspective. 


What role can investors play in tackling climate change? And is an imperative that investors consider the impact of climate change on their portfolios?

It is an imperative.
 

Investors hold one of the keys to unleash the transition to a low carbon economy at the scale and speed we need


As they consider and disclose the impact of climate change on their portfolios, and conversely the impact that their portfolios have on climate, they can engage with their investees with the aim of reducing the carbon footprint across their investments. Allocation is also critical: we need increased flows of capital, both through the equity and debt markets, allocated to low carbon assets. And finally, investors can actively engage with their governments, fostering regulatory changes that will facilitate this transition. 


As the old saying goes, what gets measured, gets managed. How important is the standardisation of language, data and metrics in mobilising capital in the fight against climate change? 

Measuring is indeed critical. Many are now making headway in this field, but we need to double down our efforts, starting with a standard taxonomy for what is a low carbon investment, as a tool to help investors in their allocation processes.
 

We also need much better metrics to assess climate-related financial risks and their impact in investment portfolios 


The recommendations of the Task Force on Climate-Related Financial Disclosure are a first step towards better disclosure. Next comes more sophisticated metrics, data collection and analytics to inform portfolio-wide decision-making.


We have come a long way since the Paris Agreement was signed at COP21 in 2015. What are the implications of this agreement for the corporate sector and how they are adapting to the post-COP21 world?

Many companies have now moved on to a business model that is not only successful economically but actually contributes to safeguard our planet from climate change. Many have adopted science-based targets to phase out greenhouse gas emissions from their operations and across their value chains. They have understood where the real competitive advantage lies, with the clean and efficient production of good and services. 


What are the big challenges that we still face in achieving the goal of limiting climate change to 2C?

The agreed challenge is to limit temperature increase to well below 2 degrees, striving for a maximum increase of 1.5 degrees. This is the temperature range that would give low-lying island states a chance of surviving in a warming world where sea levels are already rising.
 

On the path toward decarbonising, we are generally on track with the increase of renewable energy, and increasingly with the promotion of clean electric mobility 


We are not on track in the land use area, where we need to restore degraded lands, halt deforestation, protect primary forests, and shift to more sustainable agriculture. We are also not on track with moving heavy industry away from high carbon power. 


How much of a threat is President Donald Trump’s intention to withdraw the US from the Paris Accord?

At the international level Trump’s statements have not had much effect, as no other country has followed.  In fact, after he announced two countries that had not joined the Paris Agreement have joined.  The USA is now the one and only country in the world with the intent of leaving the Paris Agreement.  At the domestic level, national legislation has been weakened. 
 

However, ironically Trump has actually helped to accelerate action on climate change on the ground.  The reaction against his position on climate change has been evident among cities, states and corporations, all of which have stood up to evidence their commitment because they have already experienced benefits from decarbonising 


You have challenged all PRI (Principles for Responsible Investment) signatories to have at least 1% of their AUM (Assets under Management) invested in clean technology and renewable energy by 2020. How has the investment community responded to this challenge to date? What more needs to happen?

Very positively. Some have already over achieved this challenge and are allocating much more than 1% of their AUM to clean technology and renewables, because it is good business. Some are working towards it. The transition is well underway, what we now need is to move faster. The challenge we are facing is both one of scale and speed.
 

Significantly higher capital needs to flow at a much faster pace towards the clean economy


How important is it to influence business practice by favouring investment in companies that have lower carbon emissions and a better ESG (Environment, Social and Governance) score versus investing in companies that can have direct impact from a sustainability perspective?
 

Investors are in a privileged position to send the appropriate signals to the markets and galvanise the movement of the whole economy in the right direction


It is the investment community that has the tools at hand to influence business practice, upon which the economy rests. It is therefore critical that they send the right signals, on what is truly competitive from an investment perspective. 


We have seen a marked change in government and regulatory policy with regard to climate change. To what extent do you expect that tide of regulatory change to accelerate as we approach and pass 2020? 

Every year we see more legislation and/or regulations at national and subnational levels.  Given the increasing risks of continued exposure to high carbon assets, there is no doubt that regulation will continue to spur a carbon constrained and more stable economy.  


What other global challenges do you think we could tackle if we adopted the same transformational optimism that was required to achieve the COP 21 Paris Agreement?

Nothing about the Paris Agreement is directly applicable to any other global challenge.  However, the process through which the Agreement was reached, based on a “can do” attitude, collective responsibility and emergent leadership, will probably be very applicable to other complex and global issues such as forced migration, food security, and ocean health.  


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