Sustainable development, and the critical role of business in sustainability, has become a repeated theme on these pages and in CSR commentaries around the world. With Rio+20 now firmly on the horizon, the focus on corporate sustainability will only intensify in coming months as the UN does all it can to engage the private sector with the process.
While it remains difficult for governments to agree meaningful, decisive action on combatting climate change at the pace needed, businesses and investment funds, unencumbered by the vagaries of an unresolved political debate, are more focused on a balanced assessment of future risks.
Thanks to the likes of Mercer Global, whose report Climate Change Scenarios – Implications for Strategic Asset Allocation last year broke new ground in quantifying risks and opportunities, investors have begun to factor climate change into their risk management and asset allocations. And there are positive trends to report.
For instance, according to Bloomberg, global investment in clean energy since 2004 has exceeded $1tn, and reached $260bn in 2011, a rise of 5% on the previous year.
Lack of clear policy
However, this rise is still not enough to drive the changes at sufficient pace, and this can in large part be attributed to the lack of clear policy and regulatory frameworks on climate change. Last month’s Ceres-sponsored 2012 Investor Summit on Climate Risk & Energy Solutions at the UN’s New York headquarters, heard that investors have trillions of dollars ‘parked’ away doing nothing.
Indeed, a Brookings Institute report put before that event said: “Private sector investors will deploy their capabilities and capital on low-emission investments only to the extent that risk-adjusted returns are positive and competitive. Investors look to countries with good investment climates and well-developed capital markets where the regulatory environment and pricing signals are clear and stable.”
And it adds: “Even if these barriers to investment can be addressed through risk reduction mechanisms, technology cost gaps between high and low-emission alternatives remain in many sectors, particularly in the absence of a price on carbon.”
Filling the policy void
If one considers that current climate policy would increase portfolio risk, according to Mercer, by 10% within 20 years, investors are increasingly filling the policy void and speaking with a clearer voice on the issue.
For instance, three groups of leading investors, managing $20tn in assets, have spelt out what they want from policymakers and businesses in Financing the Transition to the Low-Carbon Economy.
Basically, this amounts to companies measuring their CO2 emissions, setting mitigation targets, integrating climate risk into their strategies and comprehensively reporting on progress. The question, pre Rio+20, is whether the UN can harness this for progress.
• Originally published in Ethical Performance in February 2012