5 Ways the Paris UN Climate Negotiations will Affect Investors

Investing Already Being Affected by Climate - Much More Expected

The so-called COP 21 climate negotiations will bring many global leaders to Paris in early December just two months from now.   

These negotiations started way back now in Rio, in the early 1990's actually, resulting in the first COP in New York City in 1995 under the auspices of the UNFCCC (or the United Nations Framework Convention on Climate Change) 

After a long buildup of related events in 2015, including Pope Francis's visit to the United States, every expectation is for these negotiations to result in tangible actions that will also affect the future of investing.

 

Here are 5 specific ways this is expected to play out:

1)  The first thing that will almost certainly occur is recognition that the global agreement will be insufficient for the scale of the problem.  

After the 2009 Copenhagen climate negotiations failed to reach a global consensus with teeth, the latest attempt is to get voluntary commitments from each country that they agree to attempt to reach independently through an INDC or Intended Nationally Determined Contribution.

A recent review of the INDCs to date show that the so-called 2 Degree limit will not be reached by these commitments.  In effect, if these commitments are met, by the year 2100, average temperature increases are expected to exceed 5 degrees Fahrenheit.  

Such additional heat will cause fresh water and food shortages, refugees, war,  disease and sea level rise among other implications.

Therefore, investors can expect increasing public awareness and a call for change to the global energy mix at an accelerated pace.

 This creates opportunities for building efficiency, new forms of energy, new forms of transportation and much more.  

Such awareness also means that companies not paying attention to ESG issues will continue to perform poorly as they have the last few years and as we have been pointing out.  

A great, truly must watch on this is Al Gore at Washington Ideas Forum last week.

 

Some find him annoying, we wondered recently if he is the best investor of all time.  

His Generation Investment Management, no longer taking new money into its flagship equity fund, has significantly outperformed its benchmark over its now  10-year history - see this week's Atlantic magazine for more on this.  

This proves our premise that ESG and expertise applied as a positive driver is now the best investment strategy as we have long argued in our own books and writings.  

Older forms of ESG didn't outperform, but positive sustainable investing did and does.  

Get on board, what are you waiting for?

2)  You are waiting and confused on this because there aren't enough positive sustainable investing choices in the market.  As we wrote here sustainable investing is going mainstream, based on a growing recognition of better financial performance.  Expect more choices through different frames in different asset classes to emerge.  

 

3)  Also expect intensifying activity on companies who are under performing on climate change.  

Trillions of Dollars of investors are asking oil companies to prove their business case or return cash to shareholders through the Carbon Asset Risk Initiative.  Wasted coal, oil and gas capital expenditure will continue to be a lens, especially as the expectation is lower cost energy going forward as opposed to peak oil.

 The Saudi's have lower cost oil to produce, why would they not continue to pump, they need the money badly.  They are also ramping up on solar which will continue.

Engagement and advocacy will only intensify, and companies will separate into winners and losers around sustainability as we saw most recently with Volkswagen's scandal which may bring the company to ruin per their Chairman and the company has already lost much of its market value and market share.  A company cheating on climate change brought to ruin sounds like a key case study to remember as you make future investment choices.  BP never fully recovered financially from the Gulf of Mexico either.  Whose next?

 

4)  There will also be a revival of cap-and-trade markets with China launching the world's largest carbon trading platform in a few years time.

Pollution levels on the ground in Asia, including the haze from burning forests near Singapore will also drive change.  The need for a US carbon tax will also be a discussion point in the 2016 elections.  Watch for climate change to be a key factor next year, which will have investment awareness implications to be very sure.

 

5)  Sustainability metrics are also under the gun, as RobecoSAM who maintains the Dow Jones Sustainability Index had BP as an industry leader right before that crisis and now has stumbled once again.

Volkswagen notes at their own website that as of September 11 (no pun intended) the company was chosen as the most sustainable in the auto sector by the Dow Jones Sustainability Index.  

Only 19 days later, after the recent emissions cheating scandal was exposed did the Index then remove VW.  During this time the company's share price dropped from 166 to 104 for a loss of over 37% which you experienced if investing in that index.

As Michelle Edkins of BlackRock said in August 2015, "the quality of ESG data is abysmal."

The 5th thing then that investors will call for is better ESG data, better data on companies and their responses to climate change, better focus on materiality and what is relevant.

The CDP Climate Leaders Performance Index is very good, for example, informing the Aiming for A coalition and also leading to financial outperformance, much as we also see in the Value Driver Model work with companies dramatically outperforming markets while becoming more sustainable.

Watch for better data, and for ESG and expertise to increasingly drive financial returns.  

The alternative is climate catastrophe and that we can't afford.