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The scene is the launch of the 2007 report produced by the Carbon Disclosure Project (CDP), in Amsterdam, December 2007. It is a measure of how much attention is now on climate change that this event is going on, and fills a lecture hall with 200 people, at the same time as the UN climate negotiations in Bali. The launch is in the plush headquarters of Dutch bank ABN-AMRO, known outside the Netherlands principally as long-time sponsors of Ajax Amsterdam football club, but one of Europe's largest banks. The audience is mostly fund managers from a range of Dutch financial institutions, as well as a handful of journalists, academics and NGO lobbyists.

The highlight of the event is the talk by Peter Bakker, chief executive officer (CEO) of parcel delivery company TNT. His company is on the Financial Times list of the largest 500 companies, the target of the CDP's annual reports. He is engaging and jovial. Someone tells us he's a friend of Bono, clearly the sort of CEO that hangs around at the World Economic Forum in Davos with the in-crowd.

Bakker tells his story of responding to the first CDP questionnaire, and starting to realise that his core business is, from a climate point of view, a very significant part of the problem. He recounts a learning process, finding out about different impacts of different modes of transport, storage systems, and so on. In particular, he focuses on the fact that there is no alternative known to kerosene for aviation fuel. He lets us know that in addition to his fleet of small planes travelling daily across Europe, he's bought two 747s recently, running nine trips a week each between China and Europe carrying the latest iPods and the like. 'Now I love the iPod', he says, but then insists that we have to find a different way to produce and distribute these things, in particular reducing the distances between production and consumption.

You start to think he's talking himself out of a job. But you can see also that he's starting to plan a business model for a sustainable economy. And that he knows there'll still be a central place for logistics companies like his, and that he can make as much money distributing things on bikes (as his company does inside Amsterdam) as on planes, and by train across the medium-sized distances in a newly-localised economy.

So then he moves on to talking about what he's been doing inside TNT. He charts the projected growth of the company's business, its sources of emissions, and what can be done about these. He talks about significant reductions in storage sites through reorganising heating and cooling systems, redesigning buildings, and so on. He discusses the progressive switching of his fleet of trucks to higher-efficiency models, about switching short-distance journeys from air to truck, and procuring electricity from renewable sources. He talks about his company's 'Planet Me' project, working with employees not only to manage the company's emissions better, but also to work with them on improving their domestic emissions, and about changing incentives, for example, to limit access to low-efficiency company cars. He talks about his pain (and that of his son) in having to sell his three-month old Porsche and trade it in for a Prius, in order to lead this transformation from the top.

But he knows that the reliance on aviation is the Achilles heel of his business. Whatever he does about other sources of emissions, there is little to be done about aviation. He recounts conversations with Boeing about possible future purchases. Given that an average 747 lasts around 40 years and takes 5-7 years to build, he knows he'll still be running it in 2050. 'So I says to Mr Boeing, what will the carbon price be in 2050. Will I be able to afford to run this plane then? Will there even be the oil available then?'

strategies of finance

Bakker's recognition of the dilemma a company like his faces in relation to climate change has many facets - including the generation he comes from (he's in his mid 40s) and the importance of Corporate Social Responsibility (CSR) to the marketing strategies of increasing numbers of corporations discussed in the previous chapter. But an important component is the way that investors forced him to think about his carbon intensity, that they started to see it as a business risk. So how did financiers arrive at this approach to climate change?

We can broadly discern four sets of strategies adopted by the financial community in response to climate change. One approach, adopted by some in the insurance industry, is to withdraw, protecting assets by taking away certain forms of coverage from some regions and clients.

A second is risk management. Here the actors deal with climate change by limiting, sharing, pooling or hedging the risks of climate impacts. This is how it works: in the 1850s, farmers in the emerging American mid West, and financiers on the Chicago Board of Trade, came together to create financial instruments which acted as insurance for the farmers against bad harvests. For the farmers, this made their incomes less dependent on the vagaries of climate, and enabled them to plan investments and live more securely. For the financiers, it enabled them to find other financial products to sell profitably, which had the handy advantage of not being correlated with the ups and downs of the stock market, thus spreading their own investment risks.1

So climate has long been the impetus for people to innovate financially to protect themselves against its changes. In the 1990s, such innovations flourished and proliferated in the face of changes in weather patterns and risks. We saw in Chapter 2 that insurers were among the first businesses to start to worry about the threats climate change posed to their industry, and we return to this history in more detail below. But while some insurers started to develop efforts to invest in renewable energy and lobby governments to develop climate strategies, the dominant approach in the mid 1990s was for the insurers to manage their exposure to the financial risks posed by increases in hurricanes, flooding and other climate-related risks.

This process is known as the securitisation of insurance risks. Traditionally, insurers have insured themselves (a process known as reinsurance) against the sorts of risks that are low in frequency but high in costs when they do occur. Earthquakes, terrorism, flooding, hurricanes, are the sorts of events involved, many of which are weather- or climate-related. But with the rise in payouts for such events from around 1990 onwards, and increasingly confident claims that such a rise is connected to increases in extreme weather events (rather than, say, the simple fact that more rich people now live in risky places like Florida, which is certainly a factor), insurers started to worry that

1 W. Cronon, Nature's Metropolis: Chicago and the Great West (New York: WW Norton, 1990), ch. 3.

reinsurance would not be adequate for the task. In the mid 1990s they started, therefore, to turn to the much bigger capital markets to help manage this type of risk.

The outcome was a market in 'catastrophe bonds' and 'catastrophe futures' which by 2006 was worth $5 billion.2 The logic of these deals is this: the insurer issues a bond which says that if there is no hurricane in a specified area over a certain time period, then the investor who buys the bond will return an attractive rate of interest. If, however, there is such a hurricane, the investor loses their money which is then used to pay out on insured losses from the hurricane. For the insurer it gives access to much more money than that available from the world's main reinsurers - Swiss Re, Munich Re or the syndicates in Lloyds of London. For the investor, it gives not only an attractive rate of return, but also (and importantly) an investment whose performance is not correlated to the stock markets. Hurricanes do not increase or decline in frequency and intensity with the rise and fall of stock prices, while stock prices are not (at least not yet) affected by extreme weather events.

Insurance companies are founded on the idea of risk management - calculating the probabilities of particular types of events, and working out means of spreading, hedging against, minimising or otherwise managing the dangers those events pose. They are perhaps predisposed to be conservative in their reactions to large-scale phenomena like climate change; their first thought is to cover their backs. But others take the risk-management approach to climate change in a much more entrepreneurial direction.

These entrepreneurial actors have developed a series of what are now called weather derivatives products. The classic example is that in many places companies like restaurants and bars can now buy financial products that pay out in the event of rain or snow on a Friday night. This is not an insurance product - they do not have to demonstrate that they lost money because of the rain. It simply pays out in the case of rain. Other examples include a contract where gas distribution companies pay floating interest rates on loans where the fluctuations are seasonal or reflect fluctuations in temperatures, or farmers who can use such instruments to replace traditional crop insurance.

2 D. Cummins and J. Cummins, 'Cat Bonds and other risk-linked securities: state of the market and recent developments', Risk Management and Insurance Review, 11(1) (2008), 23-47.

The growth of interest in and attention to climate has in effect stimulated other strategies for financiers. There is now a range of products which reflect the entrepreneurial opportunism of some financial institutions in inventing new ways to make money, which nevertheless enable some people to cover themselves against the risks that weather and climate throw at us.3

From the point of view of climate capitalism, the risk-management markets are perhaps less interesting than those trying to mobilise investment in decarbonisation. They could, however, play a useful role in making the transition to climate capitalism possible, as it enables companies to adapt to climate change in the meantime. But it also could make more widespread an understanding that climate change is a problem to a much wider range of actors - making pub and bar owners aware of their dependence on climate for example. More obviously important, however, is the shaping of investment decisions towards renewable energy, energy efficiency and so on. This is the result of the other two strategies of investors.

The third sort of approach is to see investment in action on climate change as a question of CSR, which, as we saw in Chapter 3, businesses in general have done. Leading financial actors such as HSBC have taken a proactive stance in declaring themselves 'carbon neutral'. Aware of public concern about some approaches to offsetting, however, HSBC claims that its priority is to reduce emissions and only buy offsets for those emissions that cannot be reduced by other means.4 They also only invest in non-forestry offsets - seeking to avoid the sorts of controversies we discuss in Chapter 7. The CSR element also becomes clear for banks like HSBC in relation to the alliances and partnerships it forms with green groups. For example around 70% of the money in the Climate Group comes from HSBC, and the company also partners with the Earth Watch Institute, World Wild Fund for Nature (WWF) and others.

But as we saw in the previous chapter, CSR has distinct limits as a basis for motivating corporations; interest fluctuates according to the whims of directors or fickle publics, and for that reason is often driven by presentation rather than substance, or responses are concentrated in the public relations (PR) departments of corporations

3 On these, see M. Pryke, 'Geomoney: An option on frost, going long on clouds', Geoforum, 38 (2007), 576-88; J. Pollard, J. Oldfield, S. Randalls and J. E. Thornes, 'Firm finances, weather derivatives, and geography', Geoforum, 39 (2008), 616-24.

4 Interview with Nick Robins, HSBC, 19 June 2008.

The Carbon Disclosure Project 65

rather than used as an opportunity to re-think corporate strategy more substantively.

A fourth set of strategies follows from this limit of CSR. It revolves less around improving the information base upon which investors make their decisions. This entails making the operations of companies transparent and accountable to external audiences, specifically investors. Investors, mostly large institutional investors like insurance companies, pension funds and mutual funds, have now started to exert pressure on other companies to disclose their emissions and act to limit or reduce them. For the most part, however, the investors are not motivated by the desire to be a 'good corporate citizen', but rather by the old-fashioned bottom line. While it would be too much to claim this is yet having significant effects on emissions, it nevertheless has significant potential to shape future investment in industries which cause climate change or might successfully mitigate it.

the carbon disclosure project

This phenomenon is an aspect of climate politics of growing importance. The most important expression of this dynamic is the CDP whose 2007 launch we described above, and which creates the sort of pressure on CEOs like Peter Bakker. The CDP, founded in 2001, is effectively a consortium of investors who write annually to corporations listed on stock exchanges, with a questionnaire asking them to report on their CO2 emissions, the business and other risks they perceive from climate change or measures to mitigate it, and their strategies for limiting their emissions. They publish the reports as well as the data provided by companies, and do summary analysis on trends (global, by region, by sector).

The key aphorism guiding participation in the CDP is that 'what gets measured can be managed'. Greg Fleming, former president of Global Markets and Investment Banking at Merrill Lynch puts it this way: 'Before CDP, policymakers could only guess at what companies were actually doing regarding climate change. Today we have much broader and more consistent data than ever before which is enabling researchers, policymakers, investors and other interested parties to make more informed decisions and this is due in large part to CDP.'5

5 See, accessed 3 October 2008.

The business benefits of the CDP are described in the following way:

The Carbon Disclosure Project (CDP) provides a secretariat for the world's largest institutional investor collaboration on the business implications of climate change. CDP represents an efficient process whereby many institutional investors collectively sign a single global request for disclosure of information on Greenhouse Gas Emissions. More than 1,000 large corporations report on their emissions through this web site. On 1st February 2007 this request was sent to over 2400 companies.6

By 2008, the CDP was backed by $57 trillion worth of assets from over 3000 financial institutions.7 The uptake has been impressive, even if it doesn't necessarily mean that climate change yet features as a normal part of corporate decision-making.8 The majority of the institutional investors continue to be based either in Europe or North America. The CDP has expanded rapidly though. The numbers of companies who are signatories, or members, has expanded, so that the 2007 report was backed by 315 investors with assets over three times the GDP of the USA in 2006. The reporting rates by companies who are sent the questionnaire have steadily increased, with 77% responding to the 2007 and 2008 questionnaires. The CDP questionnaire and reports are also public and can be accessed via the Internet. Responses from companies are available without restriction.

That the CDP operates on a voluntary basis, means, however, that companies are able to choose which of their operations they include in their emissions disclosure. Indeed most companies signed up to the CDP place a disclaimer that the information they enclose does not include their activities in some Southern countries. Moreover, there is no institutional control mechanism in place to monitor and verify company responses, though the levels of public access do mean other actors are

6 P. Newell, 'Civil society, corporate accountability and the politics of climate change', Global Environmental Politics, 8(3), (2008), 124-55 (p. 142).

7 See the Carbon Disclosure Project website at:, accessed 15 August 2008.

8 On the limits of what effects the CDP has so far had on company or investor practice, see A. Kolk, D. Levy and J. Pinkse, 'Corporate Responses in an Emerging Climate Regime: The Institutionalization and Commensuration of Carbon Disclosure', European Accounting Review, 17(4) (2008), 719-45.

in a position, at least in theory, to challenge or investigate for themselves claims made by companies submitting data.9

The CDP has also become a base for other climate projects focusing on corporations. The Climate Group for example, uses CDP data as the basis for its Carbon Down, Profits Up reports,10 which attempt to show corporations the opportunities for making money while reducing emissions. As Steve Howard, CEO of the Climate Group puts it: 'Many of the companies we work with tell us the Carbon Disclosure Project questionnaire was a real trigger in their decision to start working strategically to address climate change.'11

Clearly, if increasing numbers of companies report to the CDP, and start to act on the basis of knowing that the investors behind the CDP will increasingly be reluctant to invest in companies which are either highly carbon intensive, or are doing nothing about their emissions, then significant transitions in what sort of energy companies procure, how they design and operate their buildings, what transport systems they favour both for their business and employees, could occur.

But few analysts of climate politics would have thought that this sort of activity might become important, even central, to pursuing carbon emission reductions. Most were focusing on the intergovernmental negotiations, or on the obvious 'corporate villains' such as Exxon. Even those observers, like both of us, who were following the interest of insurance companies in climate change from the mid 1990s onwards, were taken by surprise by the rapidity with which the CDP (and a few related projects) took off in the early 2000s. So where did this come from?

investors wake up to climate

As we saw in Chapter 2, one of the key developments in the global economy since the early 1980s has been the growth in the importance and power of financial actors. This has posed many problems in the climate change context as elsewhere. It has made regulation or taxation policies difficult, as governments have worried about negative reactions from capital markets which might lead to capital flight.

9 H. Bulkeley and P. Newell, Governing Climate Change (London: Routledge, 2010).

10 Climate Group, Carbon Down, Profits Up, 3rd edn. (London: Climate Group, 2007). Available at: pdf, accessed 9 November 2008.

11 See, accessed 3 October 2008.

But it has also created opportunities. Some financial actors became interested in climate change for their own reasons. In the early 1990s, some insurers, in particular reinsurers12 like various Lloyds syndicates as well as the world's two biggest reinsurers, Swiss Re and Munich Re, noticed something novel and worrying.

In the 30 years before 1988, there had only been one of what they called a billion-dollar cat (a catastrophe with a billion dollars of insured losses). From 1988 onwards, the numbers of such events exploded. Some of this was attributable to shifting populations, in particular more affluent Americans moving to Florida and elsewhere in the hurricane-prone south-eastern USA. But they also were of the view that the number and intensity of flooding and windstorm events was also changing significantly. This concern was made particularly palpable in 1992 with Hurricane Andrew, which caused $17 billion of losses, the biggest loss in history from a single catastrophe (Katrina has of course since dwarfed it).13

Jeremy Leggett, with Greenpeace International at the time, was one of the first to realise this potential, and decided to focus his energies on insurance companies. His idea was to persuade them to think of climate as a serious risk, but one which they could use their financial muscle to mitigate. Insurance at that point was a $1.3 trillion industry, roughly the same size financially as the oil industry, but capable in principle of influencing many others through their investments.

Leggett was acutely aware of the range of strategic options available to insurers that we discussed above. In his view, they had three choices: they could try to ignore the rise in payouts, hoping it was a temporary blip; they could try to respond defensively, withdrawing coverage from high-risk areas and increasing premiums; or they could be proactive and use their investment power to shape carbon emissions and mitigate the sources of the increased risk.14 The United Nations Environment Programme (UNEP) acted in 1994 on this concern, creating its insurance industry initiative (which later merged with its banking initiative to become its UNEP Finance Initiative, or

12 These are the companies who take on specific risks from the direct insurance companies. They provide extra cover against the low-probability, high-payout risks like hurricanes, floods and the like.

13 A. Dlugolecki, 'An insurer's perspective', in J. Leggett (ed.), Climate Change and the Financial Sector (Gerling Akademie Verlag, Munich, 1996), pp. 64-81.

14 J. Leggett, Carbon Wars: Global Warming and the End of the Oil Era (London: Penguin, 1999).

UNEP FI), along with a number of the insurance companies who had become active on the subject.

But mobilising this power proved remarkably difficult. In the 1990s, the active members of UNEP FI were limited to a small group of individuals from particular companies. Many were from ethical investment companies so committed through their particular relationship to their customers (such as Tessa Tennant at NPI Global Care), or from reinsurance (Swiss and Munich Re, in particular) because of their particularly extreme exposure to climate risks.

For much of the 1990s, it looked like insurers would go, for the most part, for the second of Leggett's options. They did attempt to withdraw coverage from certain areas; they also increased premiums in many places against weather-related risks. They exerted efforts developing new financial instruments such as 'weather derivatives' and 'catastrophe bonds'. It looked like Leggett's and UNEP's hopes would be dashed.

the turning point

In the early 2000s, however, the situation changed rather rapidly. One element in the UNEP FI strategy was to develop a tool for 'benchmarking' the CO2 emissions of companies, which we discuss in more detail below. This became the basis of two projects in the early 2000s which took off: the Global Reporting Initiative and the CDP. The latter in particular expanded rapidly. What happened in the early 2000s to change this situation?

Part of the answer is in the crisis in corporate governance sparked by the scandals that enveloped Enron and WorldCom. These highlighted the need for greater oversight of what corporations were doing with investors' money. This prompted the rise of shareholder activism, and concerns about liability that drove companies, answerable to shareholders, to justify whether their actions (and more importantly inactions) were putting investors at risk.15 Much of the pressure NGOs started to put on companies went through the finance houses that managed the pension funds and life insurance funds which own most of the shares in the global economy. The question went from being 'can you afford to act?' to 'can you afford not to act?'

15 Greenpeace, Platform and Oil Change International, BP and Shell: Rising Risks in Tar Sand Investments (London: Greenpeace, 2008).

By the year 2005 there was a record number of shareholder resolutions on global warming. State and city pension funds, labour foundations, religious and other institutional shareholders filed 30 global warming resolutions requesting financial risk and disclosure plans to reduce greenhouse gas (GHG) emissions . This is three times the number for 2000-2001. Companies affected included leading players from the automobile sector such as Ford and General Motors, Chevron Texaco, Unocal and Exxon Mobil from the oil sector, Dow Chemicals and market leaders in financial services such as J. P. Morgan. Groups such as the Coalition for Environmentally Responsible Economies (CERES) and the Interfaith Centre for Corporate Responsibility (ICCR), a coalition of 275 faith-based institutional investors, have been using their financial muscle to hold companies to account for their performance on climate change. They demand both information disclosure and management practices that reflect the values of their shareholders. Approximately one half of the resolutions filed have been withdrawn by the shareholders after the targeted companies agreed to take actions against global warming that the filers judged to be adequate.16

Actions have taken a number of forms. In the USA in 2004, faith-based investor networks filed resolutions against American Electric Power (AEP), Cinergy, Southern Company, TXU Energy and Reliant Energy to disclose their emissions. The companies agreed to prepare and issue reports measuring their emissions and to outline their plans to address the financial implications of their contributions to global warming. Reliant Energy meanwhile agreed to include disclosure of an environmental issue assessment in its filings to the Securities and Exchanges Commission (SEC, the regulator of financial industries in the USA) , to amend its Board Audit Committee Charter, annual reviews, and to post environmental information on their website. Overall, the resolutions led to distinctive agreements, but with some common links: acknowledging climate change impacts in securities filings and on corporate websites, assigning board-level responsibility for overseeing climate change mitigation strategy, and benchmarking and GHG emissions reduction goals.

Amid the apparent success of these initiatives in bringing about change, it is important to reiterate the limitations of shareholder activism. There is no obligation upon a corporation to implement resolutions that have been passed. In 2005, CERES and ICCR

16 P. Newell, 'Civil society, corporate accountability and the politics of climate change', Global Environmental Politics, 8(3) (2008), 124-55.

Benchmarking carbon emissions 71

organised a resolution at Exxon's AGM asking for disclosure of plans to comply with GHG reduction targets in Kyoto jurisdictions. The resolution gained the support of 28.4% of Exxon shareholders. But the company's Shareholder Executive Committee authorised Exxon to censor the result, omitting the petition from its report to the SEC. A further commonly acknowledged limitation of shareholder activism is its restriction to countries in the Anglo-Saxon world where finance is particularly dominant. Though there is some evidence of growing interest in Socially Responsible Investment (SRI) in Japan, for example, the global nature of this strategy is limited. Differences in corporate structure and culture mean that the spaces for changing corporate conduct from within are uneven depending on the company in question and the region in which they operate. In the USA shares are more widely held than in Canada where the shares in publicly traded corporations are concentrated in a few hands.

The attraction of targeting the climate investments of key investors is the ripple and spillover effect of this to other investors and the scale of change that can be achieved by shifting the position of just one powerful financial actor. In response to shareholder pressure, for example, J. P. Morgan will now assess the financial risks of GHG emissions in loan evaluations. It will use carbon disclosure and mitigation in its client review process to assess associated risks linked with high carbon dioxide emissions. Others may follow suit with growing attention from activist groups such as BankTrack seeking to embarrass banks into action by exposing their role in fuelling (literally) climate change by providing the credit and capital that underwrites large energy-intensive projects.17

So finance is a key part of the risk-management picture. But as climate policy developed, finance also led the way in identifying new business opportunities in climate change.

benchmarking carbon emissions

Behind this growth in investor interest in climate change is a tool developed initially amongst UNEP FI members, that of benchmarking carbon emissions. The central strategy of investors has become an attempt to get other companies to make their CO2 emissions transparent and visible. If you can get companies to report on their CO2 emissions, according to a standardised format, then investors will be able

17 See

to use this information in their investment strategies. The idea is that companies which are more CO2 intensive are riskier than less intensive companies, even without taking climate change into account. When the various risks to their business posed by climate change are taken into account - in particular the risk of regulation which will reduce consumption of coal, oil and gas - then investors should be wary of putting money into those companies. Many investors are so large that they have little choice if they want a diversified portfolio - which they need in order to spread investment risk. So if they do have to take these risks of regulation into account, then they have strong incentives to become active in the management of those corporations to make them less CO2 intensive, through reducing consumption, investing in renewables, and so on.

This process started in 1998 when Tessa Tennant of NPI Global Care, acting for the UNEP FI, proposed a CO2 benchmarking scheme.18 Under this, the CO2 intensity of companies would be made public and investors would be able to use this in their investment decisions. The UNEP FI group developed its methodologies for calculating CO2 emissions over the next few years.

But these arguments only really became plausible to many investors in the aftermath of the governance scandals of large corporations in the early 2000s (see Chapter 3) and the development of shareholder activism that we document above. As Enron and others went under, activist managers at the UNEP, the Pew Center, CERES and elsewhere were able to add to this melting pot of arguments the advantages of climate change as a means of portraying themselves as good corporate citizens, and thus evade both public criticism and potential litigation. In the aftermath of this crisis, the CO2 benchmarking proposal, which had lain dormant for several years, blossomed into a series of initiatives - most notably the CDP.

In the same vein, a number of investors in the USA started to put pressure on the SEC to require companies to disclose their carbon emissions. The principle of disclosure in financial regulation is that investors ought to have available to them the information necessary to make well-informed investment decisions. Companies like Merrill Lynch, who also play a leading role in the CDP, argued that companies

18 C. Thomas and T. Tennant, Creating a Standard for a Corporate CO2 Indicator. Working Document 980526 (Geneva: UNEP Economics, Trade and Environment Unit, 1998).

ought to be required to disclose their carbon emissions, because such emissions would be materially important to investors.

This could be because governments were developing regulations to limit carbon emissions, and thus carbon-intensive companies would become less profitable. Or it could be because they would be exposed to lawsuits for failing to act to limit emissions. A number of such lawsuits have already been prepared against individual corporations who fail to act on their own emissions. The Climate Justice Programme, a coalition of green NGOs and lawyers, for example, sued AEP, Southern Co, Xcel Energy, Cinergy and the federal Tennessee Valley Authority, accounting for about 10% of US emissions between them, for failing to act to limit them.19

investment, carbon markets and profits

Investors were, however, not just motivated by the need to cover their backs against lawsuits. As the emissions trading bandwagon rolled onwards, especially after Kyoto, and the voluntary carbon markets emerged, investors came to identify climate as simply a means to make profitable investments. They poured money into venture capital initiatives to support offset schemes and the official emissions trading markets and they created investment companies to channel money into these.

The history of a company like CantorCO2e is instructive here. It started as Cantor Fitzgerald, a US investment bank, which identified opportunities in the emerging carbon market. The zeal and expertise of a small group of people, some with a background in finance, but others with backgrounds in think-tanks working on climate change and emissions trading, drove the search for attractive investments. Many other carbon finance houses, like EcoSecurities, Climate Care or Climate Change Capital, are similarly the result of a marriage between enthusiastic climate change entrepreneurs and

19 P. Brown, 'US power giants face landmark climate lawsuit', The Guardian, 22 July 2004. See, accessed 19 December 2009. On pressure on the SEC, see S. Mufson, 'SEC Pressed to Require Climate-Risk Disclosures', Washington Post, 28 September 2007. See AR2007091701833.html, accessed 19 December 2009; T. Gardner, 'Big investors Urge U.S. to Slash CO2 Emissions', Reuters, 20 March 2007. See http://www.reuters. com/article/environmentNews/idUSN1928444220070320, accessed 19 December 2009.

large financial institutions such as J. P. Morgan looking for new ways to make money.

This development was most rapid in the UK. In part, they were aided by a realisation of the UK government that it was well placed to benefit from emissions trading schemes in particular given the dominance of London in global financial markets.20 But investors in the biggest market in the world, the USA, feared being left out. Business pressure for the development of an emissions trading scheme in the USA came at least in part from fears of losing market share to Europe after the USA withdrew from Kyoto.

Financiers thus started to lead the way in identifying new business opportunities in climate change. Emissions trading systems and the carbon offset markets were key here. As negotiators in the run-up to Kyoto (and then shortly afterwards in the EU - more recently elsewhere) started seriously to look at these mechanisms, financiers started to wake up to the opportunities presented by such markets. With one or two exceptions, they had not been involved in pressuring countries for emissions trading, or even helping with their design; countries had done this (at US insistence) principally to give themselves flexibility in meeting their emissions commitments and to keep costs down. But once Kyoto was in place, banks like Barclays, Deutsche Bank or Cantor Fitzgerald set up 'carbon trading' arms. Many new start-up small financial institutions were also set up in this period. A few, like EcoSecurities, were established before Kyoto, but most, like Climate Change Capital, came shortly afterwards, to build a product range in the new emissions trading and carbon offset markets. Many of these start-ups were later gobbled up by other large financial institutions like J. P. Morgan.

While initially created by government policy, these markets are in large measure the product of these financial actors. They saw the basic design of an emissions trading system, or an offset mechanism like the CDM, and transformed it into an elaborate market, with the standard features of many other financial markets - with differentiated products to meet diverse client demands, derivative markets (futures, options and the like), information-diffusing mechanisms, and even more recently its own credit-rating instrument (IDEAcarbon).21 Companies

20 Between the mid 1990s and the mid 2000s, London had taken over from New York as the world's largest financial centre.

21 IDEAcarbon describes itself as 'an independent and professional provider of ratings, research and strategic advice on carbon finance. Our services are designed designed particular strategies for trading off the investment risk against the rate of return. They also created spin-off markets, notably the voluntary carbon markets. They have built from these modest policy instruments a market worth $128 billion in 2008.22

It is of course possible that all this financial activity is a distraction from the hard politics of reducing emissions. But beyond the important political dynamic which we come back to later in the book, the fact is that emissions trading schemes have built a powerful constituency among financiers who have a vested interest in carbon emissions reductions. It is important not to underestimate the shift towards an 'opportunity' mentality. The previous assumptions about the economics of energy depended on settled, if not lazy, assumptions that energy markets worked optimally, that coal and nuclear were the cheapest, that renewables were expensive and unreliable, and that there were no real opportunities for efficiency improvements. Companies were largely in a complacent mode regarding these things, and thus attempts to reduce emissions looked like a threat.

The shift to thinking in terms of opportunities reverses this logic. A set of ideas has always been present in energy debates which favours investments in efficiency, conservation, renewables, decentralised or 'distributed' production and so on (what Amory Lovins called in the 1970s 'soft energy paths').23 But they have been marginalised in energy policy circles (except in Denmark), known disparagingly as the 'Cinderella options'. The shift to opportunity as a way of thinking, led by financiers, is helping to produce a reversal of this situation. The ugly sisters become more ugly as a result, and the neatness of the fit between Cinderella's foot (soft energy paths) and the glass slipper (decarbonisation) is increasingly obvious to many. For example, global investments in renewable energy went from $27 billion in 2004 to $100 billion by 2007, with much of the money coming from recently established carbon investment funds.24 Growth rates for many types of renewable energy have been correspondingly high: annual growth to provide leading financial institutions, corporations, governments, traders and developers with unbiased intelligence and analysis of the factors that affect the pricing of carbon assets'., accessed 21 July 2009.

22 K. Capoor and P. Ambrosi, State and Trends of the Carbon Market 2009 (Washington DC: World Bank, 2009), p. 1.

23 Amory B. Lovins, Soft Energy Paths: Toward a Durable Peace (Penguin Books, 1977).

24 UNEP Press release, 'Climate change worries, high oil prices and government help top factors fueling hot renewable energy investment climate', 20 June 2007 (Paris: United Nations Environment Programme, 2007).

rates of 60 per cent for solar photovoltaics, 42 per cent for biofuels, and 25 per cent for the more mature wind energy, between 2002 and 2006.25


It is by no means certain that investors will keep up the pressure on other companies and on states to disclose CO2 emissions, or that such pressure will succeed. It is also far from clear that the growth in investment in renewables in particular will be sustained such as to fundamentally reshape the world's energy system. But it is clear that, given the neoliberal context we live in, mobilising the money of private investors, most of whom are large institutional investors like insurance companies and pension funds, will be crucial to achieving this transformation to a low-carbon economy.

For carbon markets to have a substantial effect on emissions, rather than just enable the rich to offset theirs, incentives must be created to shift the behaviour of large-scale financial actors that wield such power in a neoliberal world. A number of these actors, as we saw in Chapter 2, have particular reasons to worry about climate change. Insurers worry about their ability to calculate insurance risks in a changing climate. Bankers worry about their business and housing lending becoming increasingly risky because of increased flooding and extreme weather events. They can deal with this to an extent through the creation of risk-management markets as we saw earlier on, but to rely on this alone is, well, risky.

But translating the concern of the insurance industry into action to shift investments away from carbon-intensive activities is not a simple affair. Clearly, the pursuit of climate capitalism entails shifting investment massively towards renewable energy, energy efficiency and conservation, and new forms of infrastructure, ranging from the high technology solutions like intelligent management of electricity demand26 to the simple expansion of bicycle paths. At the moment, these institutions, like their public counterparts in the World Bank,

25 REN21, Renewables 2007: Global Status Report (Paris: REN21 Secretariat, 2008), p. 10.

26 Such as the systems proposed which would trigger high-energy consuming items like fridges to turn automatically off for two minutes during advertising breaks in peak television time, thus reducing the total load needed for the system and increasing the potential share of the supply that renewable energy can make. See G. Monbiot, Heat (London: Penguin, 2007), p. 116.

still predominantly invest their money in companies which are both heavy producers and consumers of fossil fuel energy. This is the case even for those who are particularly worried about climate change. What will trigger these shifts in investment? In part, this depends on the construction of a carbon economy which produces a predictable price for carbon emissions, thus giving signals to investors that carbon intensity is, indeed, a business risk.

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