The Paris climate talks could jolt private sector investments worldwide

The deal inked at COP 21 will likely deliver a mixed report card on efforts to reduce emissions, but the talks will spur the private sector to adopt low-carbon business models, says Sindicatum Sustainable Resources chief executive Assaad Razzouk.

Over the past three decades annual climate talks under the United Nations banner have become part of the Zeitgeist of a large movement. They draw government officials, think tanks, civil society, journalists and the occasional hipsters into negotiations over which ride trillions of dollars and our future well-being on Earth.

Expect a lot of drama at the next instalment, taking place in Paris in late November.

Heads of state will make grandiose pronouncements.

Negotiators from 190 countries will huddle, whisper, argue over words for days and bargain in stuffy rooms in a style that would make bazaar traders proud.

Civil society will push for strong outcomes, prod for more climate finance, demonstrate occasionally (a welcome activity in Paris), express anger followed by frustration before going home let down again.

The press and the public will turn an inattentive, occasional eye to the 45,000 people gathered in Paris, then turn their attention away.

The private sector, two-thirds of global GDP and employment, will be largely absent (it is not formally represented in the negotiations) and mostly ignore the whole thing.

At the end, governments will cobble together a weak agreement to set emission reduction targets. Some will declare a major win, others will accurately note that we need to do much, much more. Then everyone will go home in time for the Christmas holidays and most of COP21, as the Paris UN gathering is known, will be forgotten.

Deeply buried in this cacophony are two emerging themes with the potential to significantly impact the private sector.

National low carbon business plans

A Paris climate agreement, no matter how wobbly, will involve more than 150 countries publishing mini business plans for their economy describing what each will do to help limit global warming to 2 degrees Celsius by 2030. In typical UN jargon, these low-carbon business plans are known as INDCs, short for “intended nationally determined contribution.”

The INDCs are the driving force of COP21 and will become the development pathway for all countries. Weak and general at first, they will become stronger and more detailed over time.

Two major consequences will follow.

First, multi-trillion dollar investment opportunities for the private sector will be clearly delineated, while others, far from where the country is heading, should be avoided.

For example, India’s business plan shows it wants to increase its clean energy generation capacity from 36 GW today to a whopping 320 GW by 2030. Similarly, China wants an extra 775 GW of renewables by 2030, on top of its existing 425 GW, the US wants to add an extra 179 GW and the EU another 380 GW.

Taken together, that’s double the world’s current renewable energy installed capacity (excluding hydropower) in investment potential, all of which comes with strong institutional support now that it is anchored in an INDC.

Second, the breadth of these INDCs means that within a few years, all finance will be climate finance; and all bonds will be green bonds.

In fact perhaps we will see “black bonds” emerge, highlighting investments that are increasingly unacceptable and at risk of being stranded because of their high emissions.

We already know the commitments in Paris are nowhere near enough: The US, Europe, and China alone use up the world’s entire carbon budget by 2030. Therefore it’s reasonable to expect that they will get tougher, tighter and more precise with time because countries will be under increasing pressure to deliver, as climate change hits all of us harder and harder.

Post-2020 (the INDCs will most probably be reviewed in five year cycles), there is therefore likely to be a “wall of shame” hitting anyone who invests in non-INDC compatible, non-climate friendly technologies. In fact perhaps we will see “black bonds” emerge, highlighting investments that are increasingly unacceptable and at risk of being stranded because of their high emissions.

INDCs will make green investments even more mainstream than they are today and ensure that dirty investments are avoided on a long-term scale.

Loss and damage

“Loss and damage,” another major theme in Paris, could have enormous financial consequences.

“Loss and damage” refers to the need to account for the impact of climate change, for example on a small island nation losing territory because of sea level rise. An element of climate negotiations for several years, its significance could be enormous for insurance companies, reinsurers, financial analysts and the markets.

Governments will continue to argue whether loss and damage is a euphemism for liability and compensation. Richer nations will end up ensuring that the answer is vague, and that therefore they can’t be held liable and won’t have to pay compensation.

However, the door is likely to be kept open for clever lawyers to use the “loss and damage” aspects of a climate change agreement to launch claims against companies: Victims of climate change will aggressively try to go after corporate polluters for compensation, particularly the likes of Exxon, Shell and BP who have known about climate change for decades but either buried the evidence or ignored it to accumulate profits at the expense of our collective health and well-being.

The results of these claims could be shocking for many. The Dutch proved earlier this year that climate liability lawsuits can stand up in courts.

The business and the financial world will be markedly absent from Paris, but should closely monitor the evolution of INDCs and of “loss and damage” in Paris. These could upend how they currently do business.

 

Assaad Razzouk is chief executive, Sindicatum Sustainable Resources. This post was originally published on Huffington Post and is reproduced here with permission.

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