Money talks: Investor pressure is key to tackling climate change | Business News

Nobody really doubts that climate change is a threat to the world.

The question is how to make the world deal with it. And, like so many things, it comes down to protest and money.

The Paris Agreement of 2016 created a framework that has been ratified by 185 countries – pretty much the whole world. But since that agreement was drawn up, progress has been limited.

Take one statistic – the value of the fossil fuel sector. If the Paris Agreement had really united the world on the path to a carbon-free future, you’d imagine that fossil fuel companies would be in freefall. Their shares would have dropped in value as the world started to shun oil and its myriad by-products.

Instead, the value of the fossil fuel sector is reckoned to have gone up by $580bn (£445bn). Financial markets, it seems, don’t think the world will stick to the deal it signed in Paris.

Two traders confer seconds after the closing bell on the floor of the New York Stock Exchange (NYSE) on February 1, 2019 in New York City.
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Financial markets, it seems, do not think the world will stick to the deal it signed in Paris

So how do you change that? There’s no doubt that global protests have sharpened the attention of the corporate and banking world. When I spoke to Sarah Breeden, who leads the Bank of England’s work on climate change, she told me “anything that attracts attention and emphasises the need for action to happen early is a good thing”.

But protests alone won’t deliver the Paris targets. That’s why the latest United Nations report focuses on one subject above all else – money.

Its theme, spread over more than 100 pages, can be synthesised into this: climate change is bad for business. It’s going to cost a lot of money to get things sorted, but the longer the world delays, the more difficult and expensive it will get.

“The cost of inaction is categorically much higher than the cost of taking action,” according to Aviva’s Steve Waygood. “This is the world’s biggest market failure.”

Scientists say agriculture, loss of habitat and climate change have affected insect populations
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The UN report is about business risk and investment, rather than animals and glaciers

That failure, that sense that the system isn’t working, was one of the motivations behind the protests. And, make no mistake, those protests can change the corporate reaction to climate change.

Why? Because protests can lead to changes in government policy, which is crucial when you scrutinise the corporate reaction. Put simply, big companies rarely want to “get ahead” of policy, to do things that the government hasn’t put into law, and their investors won’t force them in that direction. But if policy changes, then investors can push harder.

However you cut it, the costs are huge. For a start, the money needed – even now – is eye-watering. Moving our economies away from oil, and over to renewable energy will cost trillions of pounds in investment. It might also need some significant changes to the rules.

Aviva's chief responsible investment officer, Dr Steve Waygood
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Aviva’s chief responsible investment officer, Dr Steve Waygood
Sarah Breeden, the Bank of England's executive director for international banks supervision
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Sarah Breeden, the Bank of England’s executive director for international banks supervision

The Bank of England assesses the security of our big financial institutions by counting the assets they could sell in a hurry (stocks and corporate debt, for instance, known as liquid assets) and weighing them against the things that would be very hard to sell quickly (a half-built block of flats, for example – which you’d call illiquid).

Fearful of a financial crisis, regulators prefer to see lots of liquid assets so banks or insurance companies could raise money in a hurry. On the face of it, that’s entirely sensible.

But it does create a curious position – that finance companies get more credit from their central bank for buying shares in oil companies than putting up the money to build a wind farm. For a company such as Aviva, which says it wants to invest in green infrastructure, such as offshore wind farms, that’s a frustration.

Will it end? The Bank of England’s Sarah Breeden told us that many regulations came from looking “in the rear-view mirror at what has happened but climate change is, by definition, a forward-looking risk”. The impression I get is that the Bank is open to a debate; Ms Breeden herself told me that climate change was “an unprecedented challenge”.

So the report from the United Nations has done a neat trick of turning this into a story about business risk and investment, rather than animals and glaciers. The environmental lobby have already made their opinion felt. It is the financial world that now needs to get behind the climate change movement.

 A general view of the London Skyline including the London Eye on February 19, 2019 in London, England
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The theme of the UN report is that climate change is bad for business

The next stop will come in Aberdeen later this month, when BP holds its annual general meeting. It will face a shareholder resolution, backed by institutional investors, demanding clear climate change targets, greater monitoring, more responsibility.

For years, oil giants have resisted these moves but now – perhaps – the tide is changing. Earlier this year Shell accepted responsibility for the emissions produced by its products.

BP is next in line, with Chevron and Exxon coming up after them. All have faced protests before, and come out the other side. But now the challenge is coming from financiers, companies controlling hundreds of billions of pounds worth of assets. And that may be much harder to resist.

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