The Impact Alpha | September 13, 2018

Running to stay ahead of the storm…and the climate catastrophe

David Bank
ImpactAlpha Editor

David Bank

In the Carolinas, residents scramble to get out of the way of Hurricane Florence. In San Francisco, advocates scramble to get to dozens of events around the Global Climate Action Summit.

The juxtaposition reinforces the summit’s sense of urgency, but also the sinking feeling that the initiatives on offer may be too little, too late to avert climate calamity. As if the reinforcement was necessary: this summer saw three of California’s biggest wildfires ever.

I’ve spent the week bouncing between the two emotions, but in the end I’ve got to go with the palpable energy of the bottom-up and broad movement that is powering the inevitable low-carbon transition. What’s the alternative? Not inevitable is whether we’ll get to that future economy in time.

The organizers of America’s Pledge, launched last year by Michael Bloomberg and California Gov. Jerry Brown, went to great lengths to demonstrate that, despite President Trump’s decision to withdraw from the Paris climate agreement, the U.S. could still get close to the original 2025 goal of a 26% to 28% reduction in greenhouse gas emissions below 2005 levels (we’re about halfway there). Organizers say the pledging cities, states and businesses represent 173 million people and $11.4 trillion.

A related effort, We Are Still In (as in, in the Paris agreement), presented hundreds of new “commitments.” Brown this week signed an executive order to get California’s electricity supply to zero-carbon by 2045. Virginia’s move to regulate methane leaks from natural gas infrastructure and landfills comes at the same time the Trump administration is seeking to weaken such rules nationally.

But even achieving the emission reductions agreed to in Paris is not enough to keep the world under the agreement’s limit of 2-degree Celsius global temperature, especially as other countries are lagging their Paris commitments. At the summit, the U.K.-based global Under2 Coalition, which claims states and regions with $34 trillion in GDP and 1.3 billion people, signed up provinces in India and South Korea, as well as Hawaii, for “deep decarbonization” efforts, through 2050, to keep global warming below 2°C.

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The same tension between impressive ambitions and modest progress comes up with the nearly 400 investors representing $32 trillion in global assets who have signed on to at least some part of “The Investor Agenda.” The agenda includes not only investment commitments but pledges around disclosure, corporate engagement and policy advocacy.

But out of the trillions in assets, only a small number of billions have been committed to low-carbon investments. Even the most forward-leaning pension funds — which are led, as usual, by the northern Europeans, Canadians, Australians and Californians funds (ok, New Yorkers, too) – have only modest goals. For example, APG Asset Management, the Dutch pension fund manager, has increased its sustainable energy investments from 2.6 billion in 2015 to €4.8 billion last year. La Caisse de dépôt et placement du Québec, the second-largest pension fund in Canada, is on track to place $6.2 billion in low-carbon investments by 2020, a 50% increase.

“A good retirement requires a good world, a clean, safe and peaceful world” said Peter Borgdorff, the CEO of the Dutch pension fund PFZW, at Phenix Capital’s Impact Summit America, held alongside the climate gathering. The health care pension fund pressed its asset manager, PGGM to commit to place €20 billion, or 10% of its portfolio, in “solutions” aligned with the Sustainable Development Goals, specifically in climate and pollution, clean water, food security and healthcare by 2020. They’re at 12 billion so far.

Dutch pension fund moves from impact alignment to impact management

For its part, APG has a 2020 target of  58 billion in investments advancing the SDGs (it’s at about 50 billion), said APG’s Anna Pot. “Setting targets is great, but it’s also a risk,” Pot admitted at the same event. It is difficult to find investments that meet financial requirements and make specific contributions to the global goals, she said.  “At the moment we are doing fine, but what will happen in 2020?It’s not a given that by that time we will make that target.”

What appears to be the slow and uncertain pace of change seems fast to veterans of “legacy” finance. At the Phenix Capital event, Jameela Pedicini of Perella Weinberg Partners said she wouldn’t have predicted five years ago the arrival by now of billion-dollar impact funds from private-equity giants like TPG, KKR and Bain.

BNP Paribas’ Hervé Duteil likewise called the present moment “an inflection point” in the takeup of sustainability as a core business imperative for every company and financial institution. “Five years ago it was not a topic. Now it’s a topic everywhere,” he told me. “Five years ago, only the most advanced players were looking at say acquiring wind farms for their operations.” Today, every corporation “is talking about sustainability in one form or another, whether setting science-based targets, or financing and scaling up sustainability projects.”

BNP Paribas has committed to double its on-balance-sheet financing for renewable energy projects to €15 billion ($17.4 billion) per year by 2020. To date, it has arranged over €155 billion of financings directly contributing to the achievement of the UN SDGs, with a goal to reach or exceed €185 billion by 2020.

The gap in such financing is on the order of a trillion dollars per year. Other banks commitments to scale up – generally by 2025 or 2030 – will likewise fail to meaningfully close that gap. Goldman Sachs’ 2025 target is $150 billion – total – in clean energy financing and investing. HSBC has pledged to close $100 billion in sustainable financing and investment by 2025. JPMorgan Chase plans to facilitate more than $200 billion in clean financing by 2025 (an average of $25 billion per year, compared to about $17 billion in 2016). TD Bank announced a 2030 target of C$100 billion (US $78 billion) for low-carbon lending, financing, asset management and other green programs.

Organizers seek to turn commitments into capital at Global Climate Action Summit

Meanwhile, all eyes are on the weather this morning. An analysis from Stony Brook University’s marine and atmospheric sciences school, suggested that human-induced climate change has increased rainfall from Hurricane Florence by more than 50% and has made the storm both bigger and longer-lasting than it would otherwise have been.