Select Committee on Environmental Audit Written Evidence

Memorandum submitted by the Institutional Investors Group on Climate Change (IIGCC)


  The Institutional Investors Group on Climate Change (IIGCC) was established in 2001 as a European initiative to promote the assessment and active management of the investment risks and opportunities posed by climate change. Our membership comprises 26 leading European investors, including both pension funds and fund managers, with total assets of over Euro1.4 trillion. A list of our members is provided overleaf.

  As a group, we have three main objectives:

    —  to equip our members with the knowledge and tools to integrate climate change into their investment practices;

    —  to act as champions of the importance of climate risk within the investment community; and

    —  to advocate to public policy makers the need for a proactive, orderly and efficient transition to a low carbon economy, and thereby a secure climate system.

  In our view, getting policy on climate change right is critical for protecting and enhancing the value of our investments on behalf of our clients and beneficiaries. We recognise that climate change is a product of market failure: the absence of appropriate incentives has led to individuals and companies externalising the costs associated with greenhouse gas emissions, generating significant risks to both the global environment and the global economy. As a result, public policy innovation is essential not only to minimise the damage caused by climate change, but also to maximise the opportunities from the transition to a low carbon economy. Without credible public policy frameworks, companies and their investors will be handicapped in planning how they respond to the climate change challenge. Moreover, a policy framework that fails to take account of the strategic nature of climate change could result in discontinuous change in the future, a sub-optimal outcome for long-term institutional investors.


  We recognise the importance of the issues being considered by the Committee. As IIGCC is a collaboration between investors with varied views on the environmental, technology and economic challenges at the heart of the Committee's investigation, we are not in a position to present a single, commonly agreed, view on the questions raised by the Committee in its Terms of Reference. However, we would like to propose three factors that we believe should inform the Committee's discussions, namely economics, time-horizon and innovation.

    —  Economics: Climate change has quickly moved from being an environmental threat to a strategic economic challenge of the first-order—both in terms of the physical impacts of a destabilised climate and the need to transform the energy and other sectors to deliver sufficient carbon reductions. As investors, we believe it is imperative that a sound economic approach is applied to future climate change and energy policy formulation. This means integrating the environmental and security costs of all energy options into decision-making. In this regard, the entry into force of the EU Emissions Trading Scheme has shown the effectiveness of market-based approaches that make the cost of carbon visible to investors in ways that other tools have failed to do.

    —  Time Horizon: Climate change is a uniquely long-lived threat, with impacts likely to extend for hundreds of years into the future. The policy response needs to be equally long-term, and we strongly support the 2050 targets that have been set in the Government's Energy White Paper. The challenge is to translate these aspirations into intermediate goals that can provide certainty for business and investors. Without these clear milestones, investors face two sets of risks. The first relate to the direct risks of climate change to investments; a failure to respond effectively will increase the risks associated with extreme weather events and other changes in the climate. The second relate to the lack of policy certainty. Specifically, in the absence of appropriate intermediate and long-term targets, government policy will not provide the necessary certainty for companies to move towards a low carbon economy while minimising disruptions to existing business activities (eg avoiding the need to retire capital stock much earlier than planned). That is, governments need to specify and commit to meeting long-term policy goals, in order for companies to make economically efficient investment decisions that properly incorporate climate change factors.

    —  Innovation: Climate change is a disruptive force for the British and global economies. Successful responses will require considerable technological and societal innovation to develop new products and processes that can thrive in a carbon-constrained world. This will require that attention be paid to the potential for renewables, lower CO2 intensity energy sources AND energy efficiency to allow us to respond effectively. Looking forward, the UK has the potential to profit from all three areas. For example, the UK is a leader in emerging low carbon/renewable options such as wave power and bio-fuels. The provision of appropriate investment support to allow these technologies to be further developed and commercialised is essential, and it is here that the financial services industry has a critical role to play. London's AIM market has become an attractive global arena for the providers of low carbon solutions—technology and services—to raise capital. Further attention is needed to ensure that the City of London leverages its world-leading skills to ensure that it continues to lead the way in terms of new financial products that address climate risks and opportunities.

10 October 2005

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