Idea dearth at big money sustainability summit

By Tom Rand
November 2, 2011

Tom Rand, P.Eng., Ph.D., is Cleantech Lead Advisor at MaRS Disovery District and author of Kick the Fossil Fuel Habit. Any views expressed are his own.

Curious about new financial innovations to accelerate the global transition to a low-carbon economy, I attended the recent United Nations Environment Program Finance Initiative (UNEP FI) summit in Washington, D.C. This was a gathering of big money and those who shape its flows – pension funds, insurance companies, policy wonks and political negotiators.

Not surprisingly, I found nothing mind-blowing.

Our intentions are good, but we move – as always – incrementally. Catastrophic climate change still doesn’t fit our spreadsheets. Pension funds still rely on voluntary principles of risk avoidance.

But hats off to Paul Abberley, CEO of Aviva Investors out of London, England, for the best idea of the conference. Abberley wants to translate, directly, the good intentions of pension contributors into the fiduciary duty of investment managers.

Anyone on the carbon scene knows we’re at a standstill. There are bright spots like California’s brand new cap and trade regulations and Ontario’s Green Energy Act, and there are always some intrepid businesses that carve out a market for their piece of low-carbon infrastructure.

Energy retrofits are occasionally aggregated to attract a few hundred million dollars. But the big money, the trillion dollars a year we need deployed to move the needle on carbon, still sits in the wings.

Large capital will not be unlocked without political direction and price certainty on carbon, no matter how progressive or well-meaning a fund manager might be. So it’s around the COP merry-go-round we go again.

Two decent attempts to break this impasse are the Carbon Disclosure Project (CDP) and the Principles for Responsible Investment (PRI). Between the two programs, large capital flows were supposed to gush into the low-carbon sector.

Identifying a company’s exposure to carbon risk should reduce capital flow to high-carbon industries.

Adherence to responsible long-term thinking is meant to deliver better long-term returns.  CDP and PRI are meant to be filters to enable a fund manager to deliver better long-term performance. They are meant to change investment decisions.

But do they?

Probably not.

The CDP is voluntary, and until the carbon risk is made tangible, it remains an afterthought in everyday investment decisions.

The PRI has become more a method of measuring what you’re already doing, rather than changing how you do it.  It’s a way of generating metrics, not changing decisions.

So along comes Abberley’s deceptively simple idea.

Imagine a teacher, a pension fund, and an investment manager. The teacher contributes bi-weekly to the fund. And an investment manager, somewhere down the line, invests that money. There’s no real link between the two. If you asked the teacher how they would like their money invested, they might say “I want a decent return, and I want to retire in a decent world.” Voila.  Buliding a decent world means making different investment decisions. If that intention is passed through to the investment manager, we’d change capital flows.

Sounds so simple, doesn’t it?

It’s a way of making tangible the fiduciary duty of the investment manager to the funds contributors – directly, and not through third-party metrics like PRI.

To do it, just aggregate the expressed opinions of all those teachers, police officers, factory workers and public servants. Survey, anyone?

5 comments

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A question for you, Tom. Why is it that none of the big players in energy attempt to become renewable energy leaders, with the aim of conserving their limited fossil fuel resources as emergency backup? Do they honestly believe the long term viability of their business means sticking with non-renewable resources as their primary profit source? It just makes no sense to me.

Posted by changeling | Report as abusive

Changeling: Don’t think they have any motivation to be first-mover, indeed disincentive.
1. Second mover is good enough: They have the capital and muscle to come into the sector anytime they want. So just sit and wait, and when it’s big, profitable and any sort of threat, just come in and take it over.
2. Psychology: They made a ton of money yesterday, even more today, why change behaviour?
3. Psychology: It’s not easy to take on board the belief that climate change is likely catastrophic. We will all seek evidence that negates the discomfort such a belief causes. It’s literally hard to believe.
All three add up to momentum. No day is the day a captain of the fossil fuel industry wakes up thinking “today’s teh day to lead the new industrial revolution!” And so they don’t.
My two cents, Cheers, Tom Rand

Posted by TomRand | Report as abusive

For anyone interested, more information about Aviva Investors’ policy proposal can be found here – http://www.aviva.com/corporate-responsib ility/programme-updates/13023

Aviva has convened a Corporate Sustainability Reporting Coalition (CSRC) of likeminded organisations. This coalition is proposing that nations at Rio +20 commit to develop national regulations mandating the integration of material sustainability issues in companies’ Annual Report & Accounts. It is also advocating effective mechanisms for investors to hold companies to account on the quality of their disclosures – e.g. through an advisory vote at the AGM.

Such a requirement will help capital to be allocated to more sustainable, responsible companies and strengthen the long term sustainability of the financial system.

Posted by WillPomroy | Report as abusive

I like the idea, but wonder about the liability for bad investment decisions? What I observe is that we so far do not really know what to do, and how to do it, to bring about the sort of change needed. Look at what happened to Solyndra. How do you use pension fund money to back green when it is not necessarily a ‘good’ investment? Who decides? Who picks the winners?

Posted by PaulMinett | Report as abusive

Sorry to disagree, but I do not believe it is possible for humans to modify their current way(s) of living to produce anything approaching a sustainable system. Making tremendous sacrifices to benefit unknown descendants living under unknown circumstances in unknown future times is simply not yet a part of human behavior.

Rather, it seems that the consequences of our rapid and accelerating drawdown of fossil fuels will simply have to arrive. Whether our species faces a long slowdown or a sudden catastrophe, we will not begin to react en masse until the bad trouble is actually happening.

And even then, with the wolf at the door — or already inside the house — most of us may still prefer to hide under the bed and hope for the best.

Posted by Ralphooo | Report as abusive