Climate & Finance #2: The System We Need

Produced by Camille Duran / Published by Eleen Murphy / Senior Editors Eleen Murphy & Camille Duran / Transcribed by Oanh Nguyen / Music Credits: License by Ins. Green White Space. Special thanks to Han Nguyen, Magnus Emfel, Amelia Johannsen & Gabriela Lemos Borba. Photo by Serendigity/CC BY

In this episode, we take a trip to the year 2050 to look at how the financial system should look like, in a scenario where we managed to stay below 2-degree warming of the climate system compared to pre-industrial levels. We review the pre-requisites for institutional investment to align with climate science, guided by insights from our world-class experts.

This episode features views from Eric Usher (UNEP FI, Portfolio Decarbonisation Coalition) & Julian Poulter (Asset Owners Disclosure Project).

In the next episode of our series, we will go through a backcasting exercise and discuss the roadmap to reach our 2050 targets. Change management at its best!


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Transcript from the Episode



CAMILLE DURAN (CD): Our Planet is suffering global warming, and although science is telling us what to do, we are yet to rectify our trajectory. Today we stop for a second… and dream.

Because something is wrong.

Chances are that if you knew how your money is used on global markets via the investments you make, via your pension funds or your insurances. You would disagree.

Today we stop for a second… and dream.

We talked about the problem in detail in the previous episode. You may want to have a listen before going any further – link is on the page.

Because today we are going to paint the picture of the system we need – the system we need.

And as usual, we have very special guests for you.

Julian Poulter (JP): People don’t understand the links between short-term stock markets and other financial markets, and these longer-term investment problems.

Eric Usher (EU): …Or company like the car manufacturer, take Volvo, Are you responsible for your only the emissions from your factory? Or could you be responsible partly for the emissions from the cars you manufacture?

Per Bolund (PB): My name is Per Bolund. I’m the Minister for Financial Markets and Consumer Affairs and also the Deputy Finance Minister of Sweden.

Sean Kidney (SK): We actually have a whole big toolkit or things that we’ve been successfully applying in the last hundred years in Europe.




CD: You’re listening to The Green Exchange, special edition about climate and finance, episode 2 of our series. What is the system we need?

So what we’ve learned so far: The main challenges in the investment decision process are:
· That there are powerful interests at stake.
· People or entities who own the capital often lack of knowledge and ask too little about the impact of their investments on climate change.
· Asset owners apply limitation to their responsibility on the markets and ignore the reality of climate change.
· Short-term financial return is by default prioritized over long-term responsibility.
· The narrow definition of risk doesn’t connect investments and climate change.
· The fund managers lack incentive to include climate change data in their investment decisions. They also lack education on the issue and of course it would be much easier if they had a mandate to develop climate friendly investment strategies.

This is where most media channels would stop, right? Pointing fingers, a couple of headlines and we’re good to go! No sir, this is a special edition of The Green Exchange, we’re not tired. We’re going to go to the bottom of this.

Now it’s time to use our imagination. Let’s do like Neil Degrasse Tyson in the Netflix series, ‘Cosmos’ which I strongly recommend to all human beings on the Planet.


CD: We love you Neil. Let’s use the shape of the human imagination.

We land in 2050, and you’re there too! You wake up, put your clothes on, ask your robot to prepare breakfast for you. Then you google the latest news report about climate change.

Guess what? Guess what? We made it. We stayed well below 2 degrees of warming of the climate system. We made it.
Yes there are 9 billion people to feed, mega cities all over the globe and energy consumption doubled, but we finally reached the targets that the ‘old’ Paris agreement had set for us.

I know it’s crazy. So how does the system look now? What is the new face of institutional investment now that it aligns with climate science?

So just to clarify when we talk about institutional investment, we are talking about a kind of investment, which is done by an organization that provides financial services, such as an insurance company, a bank, a hedge fund, a retirement fund or a mutual fund. So I think the term of institutional investment basically covers most of the scenarios we are studying here.

I’m like you. There are words that I just need to google. No problem with that.

OK so we’re in 2050, we stayed under 2 degrees. What framework did we used to drive proper action until today?

If we managed to stay under the 2 degrees, it basically means that we’ve been able to focus capital on the long term. That the financial system has helped us operate this transition, instead of being in the way.
But what does this mean, in practice?

Well first, it probably means that we were able to put in place transparency, visibility on what investments are made where and by who. Where’s the money going? Where’s the money?

How much transparency do we actually need? How does this work?

To try to answer this question, we’re going to London to talk to Julian Poulter, Founder and Chief Executive Officer of the Asset Owners Disclosure Project.

Julian Poulter (JP): Well, how are you doing?

CD: Hey I’m good. Thanks. How are you?

CD: Julian is also a stakeholder council member of the Global Reporting Initiative. So his focus is global.

CD: The reason why the Asset Owners Disclosure Project was set up is that they found that there was no information at all…

JP: …about how the institutions at the very top of investment chain are managing the risks of climate change.

CD (aside): The Asset Owners Disclosure Project is a not for profit working with pension funds, insurance companies, sovereign wealth funds, foundations and universities to improve the level of disclosure and industry best practice. They work towards realigning the investment chain to ensure long-term investment practices.

JP: The fact that matters is the investment chain is quite complex. Essentially there are three levels. Asset owners at the very top. They tend to outsource their investments to asset managers, and asset managers investing companies. This is increasing the good level of data for a company level. In fact, some of bigger oil and gas companies and mining companies are some of the best disclosures in the world. But there is a dearth of information at the fund manager and at the asset owner level. We took the strategic view back in 2008 that whilst fund management community was very important, they were more interested in short term returns and perhaps trading more than they were long term investing.

CD: Okay so fund manager’s focus is short term, disclosure efforts should be prioritized on the players with a longer-term interest. It has types of professional asset owners you mentioned.

JP: Yes. And the asset owners all around the world that are the pension funds, insurance companies, sovereign wealth funds, foundations and endowments were the real long term investers. And so, it’s those institutions which you want to capture data about and hold to account.


CD: I would like to introduce another guest who has a few points for us on this disclosure elements.

CD: Hi Eric, welcome to the show.

Eric Usher (EU): Hi Camille.

CD: How are you?

EU: Fine.

CD: Would you mind introducing yourself for the record?

EU: Sure. I am Eric Usher. I’m the Head of the UNEP Finance Initiative, which is the long standing organization that’s a partnership between United Nations and a group of 250 of the larger banks, insurers and asset managers global.

CD: Great to have you with us, you have a few points about disclosure.

EU: Sure. So in terms of the very simple ‘what can investors do?’, well obviously the first step comes towards disclosure and assessment, and figuring out what the risks and impacts are with their portfolios, so, essentially, simplistically put the carbon footprint. So the first step is to start to footprint your portfolio.

As we know the majority of large-cap corporates today do report their carbon impacts, but there’s only a very, very small number of investors who want that information but actually don’t report themselves. So there’s definitely an imbalance and a need for investors to also start stepping up, to assess their carbon footprints and to start also making that publicly available to the users of such information. Then there is something called the Montreal pledge which is launched by the Principles for Responsible Investment a year and a half ago, to get investors to sign up…to commit to measuring footprint.

CD: How about we’re going to Montreal pledge very quick to check it out.


CD: “By signing the Montreal Carbon Pledge, investors commit to measuring and publicly disclosing the carbon footprint of their investment portfolios on an annual basis”. This is supported by the Principles for Responsible Investment (PRI) and the United Nations Environment Program Finance Initiative (UNEP FI).

There is a flyer that you can share with your investment manager, or asset owner clients. It also includes all the signatories who made the move. Signatories, thank you, this song is for you, in honor of your forward thinking.


CD: Now, there are some question marks around carbon foot-printing.

EU: Carbon foot-printing is not yet an exact science. It’s an approximate measure and part of the problem is that a snapshot of your current emissions do not say much about where you’re going. In other words whether your business strategy is already phasing down carbon intensive activities. That’s one problem.

The second, more complicated problem is what’s called Scope 3 Emissions or some call them financed emissions. Basically is not your direct carbon emissions from how you consume energy or other activities; it’s the impact up and down the value chain of your business. For instance, for a bank it means if they provide a loan to a factory, they are responsible for part of the emissions from that factory because they partly finance it. If they invest in that factory so they actually own part of factory and once again they are responsible for a share of emissions.

EU: Excuse me, Camille. Let’s me take the call for a moment.

CD: Yes, sure.

CD: In the meantime, let’s go and google Scope 3 Emissions and see what we find….

108 million results, the 3 first links are from the GHG Protocol, (Green House Gas) Protocol website.
“The GHG protocol is the most widely used international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions.” That’s probably where you spend most of your time if you like protocols, and if you like green house gas at the same time…


EU: Sorry, Camille.

CD: Yeah sure, no problem.

EU: So the other example is for a company like a car manufacturer, take Volvo. Are you responsible for only the emissions from your factory, or could you be responsible partly for the emissions from the cars you manufacture, which starts to be complicated.

So all told, the disclosure assessment is still very young and a lot of work would need to be done there, in terms of perfecting. And certainly governments play a role there eventually in starting to provide or to regulate the standards of disclosure.

CD: OK so that’s a good conclusion for now.

Disclosure & transparency are necessary components of our dream system, but the way we measure and account for carbon foot-printing needs to be coordinated & regulated by governments. A first thing we can take home.

Now, one very important component of our dream system is a definition of what sustainability means for our investment.

In other words,

– How is “staying well below two degrees translated into portfolios?
– How much is invested? In what, and by what date?

If we are under the two degrees in 2050, it’s that we were able to align financial flows with science and with international agreements.

There is a reference report that came out just before the COP21, in October if I remember, called the UNEP Inquiry: Design of a Sustainable Financial System. They said that in a developed version of 21st century financial system, we should be investing only in assets that improve social environmental outcomes, in home country and internationally.

One point that I have heard several times in my discussions is that we need to move away from the current approach which consists of measuring ‘relative performance’ – by that we mean the performance relative to others, or to ‘Business As Usual’ scenarios. Basically we need to develop and apply sustainability targets.




Another group who is doing very good work on the subject matter is the 2 Degree Investing Initiative. They have a working paper called ‘Assessing the Alignment of Portfolios with Climate Goals’ – you can find it on our episode page.

Basically, they make the case for a two degree benchmark – like a framework that informs policy makers and investors on how far – or how close we are to the policy targets. Of course, they also talk about disclosure and the role of policy but let’s stop for a second on the key elements of the methodology they advise to keep in line with the 2-degree benchmark.

Here is a good illustration of how things could work:

Let’s take Energy technology exposure for instance. I try to make it simple, the idea here is to look at granular data – plant by plant for instance. Take car production per model per country, say we take all the Volvo V70 produced in Goteborg, in Sweden.

And we look at the production forecast. From this forecast we can assess the future exposure to energy technologies. What is the exposure to coal, to oil, to gas, to renewable power, etc.

Now we’re going to compare the exposure of our Volvo factory to those various energy and technologies, to the exposure of the 2 degree benchmark.

Then we just need to extrapolate this approach to all the Volvo models, all the car brands, all the automotive sectors, then do the same for all the other sectors, well actually for all listed companies & equity portfolios on the planet….et voila!

For your information, here are people who do that kind of work for a living anyway; for instance, every year, the International Energy Agency publishes a pretty solid PDF called the World Energy Outlook. Perfect read when the kids are in bed.

The table of contents is 12 pages, the Introduction & Scope consists of 23 pages.
In other words, you’d better keep listening to the Green Exchange instead, because that’s what we do, we digest that kind of stuff so you don’t have to.

We’ll get back to this working paper later on
For now, we just want to know ‘what the system should look like to keep things under control. We’ll see how to get there a bit later.




CD: We’ve talked about disclosure, measuring carbon footprints, about the need to define how portfolios should look like to align with climate science. Now it may sound like a stupid question but:

There is a price on gold – it’s currently around 39$ per gram. There is a price on water – it’s usually between 40 cents per 1000 litres to 6 Euros per 1000 liters.
Should we put a price on carbon?

Yes, we should, of course, but how?

EU: Absolutely I mean it’s very simple to say governments should put a price on carbon…

CD: That’s Eric Usher again, from the UNEP Finance Initiative

EU (continued): And many investors going into Paris were wondering “Are we going to get a price on carbon?”, and then they realized and are understanding that there is not going to be a price on carbon, but if all goes well we’ll have the framework for what will be probably many prices on carbon. Essentially, that carbon will start to be priced, but whether it is done through taxes or carbon trading or other types of approaches, that will vary and the structure behind Paris, which is in the shift of the climate negotiations since Copenhagen six years prior, was that you need governments in the lead to establish the enabling environment essentially from the bottom up, rather than having a multilateral agreements or organizations, such as my own in the UN, expected to design instruments top down.

And yes we know the first experience with carbon trading results have been mixed. Partially maybe criticizing the instrument but more likely probably criticizing the way in which it was implemented in terms of the government involvement.

CD: I pause here for a second to mention that we you will find two links on our episode page. One is to explain in detail how the Carbon Trading Scheme we have in Europe is structured. And another resource that explains the challenges around Carbon Trading Schemes in general, and why they don’t work. back to the interview

Back to the interview.

EU: And so just a good example would be if you’re aiming to, for example, decarbonize the cement industry in India, who is best to figure out how to do that? The reality is it’s going to be Indian industry and Indian government. And a framework multilaterally, which is from since the Paris agreement can provide a broad agreement, but the reality is that it’s going to be governments and local actors, industries and civil society who figure out how to do it.

And I think that’s the beauty of the Paris agreement. It’s bottom up, and in terms of roles of government it’s essential to get the pricing right in terms of the regulatory environment, the pricing of externalities, and to ensure the other factors that allow economic development in ways that are not impacting on environmental and social factors.

CD: OK so basically, in a sustainable world, carbon needs to be priced. This is a little utopic for now. In practice, we’ve seen that it’s quite difficult to harmonize and implement. Government play a vital role on that front – we’ll get back to that in a minute. But there is one very important point we should make here.

Yes, a carbon tax is really a good instrument IN THEORY.

And we sometimes hear investors justify their unsustainable practices with arguments like:
“Yeah but there is no price on carbon…” pointing fingers to policy makers.
You know this is an excuse, my friend! If you are a responsible investor, you need to include an internal carbon price in your forecast. We also call it shadow carbon pricing.

JP: Asset owners and other long term investors…

CD: This is Julian Pouter again, from the Asset Owners Disclosure Project.

JP: (continued): …essentially can run the carbon price across their own portfolio. And they do this because there are so many uncertainties around climate risks and this carbon price put on their portfolio is a way of managing the risk in the same way that governments are concerned with managing the physical risks of climate change by putting price on carbon across the economy.

EU: Now of course there is a growing number of investors taking that perspective…

CD: Bouncing between Julian and Eric here, but you recognize the voices…

EU: (continued) Others were taking other perspectives. Certainly there are two sides of this. Is it a regulatory action which is going to impair your assets, or is it the actual climate risks that you might be running? As Mark Carney talked about the transition risks, essentially, that certain industries will quite quickly become devalued as market sentiment turns against them.

CD: So it’s basically a good planning tool to help identify revenue opportunities, risks, and as an incentive to drive maximum energy efficiency to reduce costs and guide capital investment decisions. It gives you a more correct valuation of your company in that long term perspective.
So why not start doing it now, since we don’t have that global price on carbon yet?


Another element we need for our 2050 dream system, probably obvious, but very important:

Governments need to play an active role in directing and enabling investment in line with climate science, via policy initiatives, incentives, by issuing green bonds….

We’re also going to dig into this.

And, talking about Sweden, we wanted to get a sense for what’s going on at the moment with government efforts to green up institutional investment.

[Voice] But I guess you would like to speak to the Minister?

CD: Yes please.

[Voice]: Perfect. I’ll give the phone to him. Just a second.

CD: Yes, sure.

CD: That’s for next episode. An exclusive interview with Per Bolund, Swedish Minister for Financial Markets & Consumer Affairs.



CD: So is that all we need in our dream system? Do we have all ingredients by now?

Well, one last point actually: everyone involved in the investment decision process needs to be well educated on sustainable investment and on how to stay aligned with climate science.
As we’ve seen in episode one, we cannot really expect people in the street to know everything about the system they are putting their money into. But all asset managers, asset owners, and any professional working with institutional investment need to know what they are doing, and receive actual mandates to do the right thing, not only because it’s good for the planet, but also because we’re looking at long term financial stability and returns.

Thank you to WWF for making this series on Climate & Finance possible. It’s because of their support that this special edition is accessible to everyone, and not only to our subscribers. You know that The Green Exchange ‘Plus’ makes your life much easier as a sustainability professional with, even briefings, all special editions and the community as well.
It still helps you to make the right decisions this year, so check how it works on our webpage

Don’t forget to follow us on twitter @greenXoresund, Facebook at The Green Exchange. The family is growing.

Today we were in 2050, well below the two degrees, looking at a sustainable system for institutional investment. It may be time to do some back-casting and discuss ‘how to get there’ don’t you think?

That’s for our next episode. I’ll get in my time machine again, and see you soon, back in the year 2016. Keep up the good work, in the meantime.


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