The transition jigsaw – Part 2: The role for business and investors

The transition from a fossil fuel-based economy to one powered by renewable energy fast enough to stop runaway climate change can only be achieved by action from everybody in society. In a three-part series we examine the roles to be played by governments, business and investors, and civil society to ensure timely and effective action. This week the spotlight is on business and investors.

Change: Businesses and investors should lead the transition to a clean energy economy, not simply wait for policy signals. This will benefit the climate and their bottom line

Missing link: Investors need energy projects that make financial sense in order to employ their capital to good effect. Better market monitoring is vital to demonstrate that pledges to decarbonise and divest fossil fuel assets are being fulfilled and are driving wider change

Key quote: “The acceleration of finance put into the transition needs to happen urgently. There needs to be $7 trillion a year between now and 2030 to stay on track. Private investors are trying to transition their portfolios, but there is not enough out there to invest in.”

Business is playing a well known role in the transition to a low carbon economy. It leads research and development, drives innovation and deploys capital to best effect. But it has another role, too. David Hone, chief climate change advisor at Shell, says it is also important for business to step up and take the lead rather than simply reacting to government proposals. He believes this is starting to happen with certain companies calling for carbon pricing, for example. In response to US President Donald Trump’s decision to leave the Paris climate agreement, more than 2000 businesses signed the “We Are Still In” declaration, showing their commitment to the deal. Power firm PG&E, Royal Caribbean Cruises, Allianz, Amazon, PayPal and Walmart are among the signatories.

Recent years have seen an increase in campaigns that encourage business to divest fossil fuel assets and a push towards greater climate risk disclosure. “There is real value and effectiveness in raising overall business and investor awareness of climate change,” says Nat Keohane, Washington, DC-based senior vice-president at Environmental Defense Fund (EDF), a not-for-profit organisation. Divestment campaigns have elevated the issue in boardrooms, but Keohane is unconvinced they are changing capital flows.

In the run up to the 2015 UN climate talks, institutional investors pledged to decarbonise billions of assets under their management and redirect capital to cleaner investments, with an array of pledges made at a special UN summit of world leaders in September 2014. While tracking of these individual pledges has been scarce, analysis by think tank Climate Policy Initiative, for its Global Climate Finance: An Updated View 2018 report, found that climate finance flows are steadily increasing. It estimates that 2017 saw $510-530 billion worldwide in capital directed at clean investments. Renewable energy and electric vehicles were the main beneficiaries, while private sector actors accounted for just over half of all climate investment. Of the contributions from public sector finance, the report says that 89% came from development finance institutions, primarily via national development banks.
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