Memorandum submitted by the Institutional
Investors Group on Climate Change (IIGCC)
1. INSTITUTIONAL
INVESTORS AND
CLIMATE CHANGE
POLICY
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.
2. IIGCC'S VIEW
ON THE
INQUIRY
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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