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December 22, 2009
Institutional Investors Object to Lack of Acknowledgement in Copenhagen
    by Robert Kropp

Open letter from the United Nations Principles for Responsible Investment to Heads of State asserts that the Copenhagen agreement ignores the fact that the vast majority of financing of climate change mitigation will come from private sources.

The United Nations Climate Change Conference (COP15) concluded last week without a binding agreement to reduce greenhouse gas (GHG) emissions to the extent deemed necessary by climate science. The Conference exposed a rift between developed and developing nations, one that could not be surmounted in time for such an agreement to occur.

Institutional investors were among the parties disappointed by the absence of a binding agreement. They had hoped that their work during the buildup to the Conference would have at least served as a reminder to governments that, according to Paul Clements-Hunt, Head of the United Nations Environment Program Finance Initiative (UNEP FI), “85% of financing for climate change mitigation will come from private investment.”

On December 17, the United Nations Principles for Responsible Investment (PRI), an investor initiative supported by more than 650 institutions representing in excess of $18 trillion in assets, wrote a letter to the Heads of State gathered at COP15, asking for a clear recognition “of the important role that capital markets, institutional investors and private finance, will play if the global community is to deliver the needed transformation to a low–carbon and resource-efficient global economy.” spoke with Clements-Hunt, who provided some details pertaining to the frustration over the failure of the Conference to acknowledge the role of institutional investors in the transition to a low-carbon global economy.

“The letter was driven by the build-up to CoP15, during which institutional investors put a lot of effort into crafting the type of input that would be helpful in deciding how public financing could release the private markets,” Clements-Hunt said. “But at the Conference there was a growing frustration that the investment community wasn’t being listened to.”

Clements-Hunt continued, “Institutional investors put a tremendous amount of effort into the build-up to the Conference, but because of the politics they didn’t get any recognition.”

According to reports from the Conference, developing nations refused to allow text referring to private investment in any agreement, because of fears that such language might lead to less public investment by developed economies.

The PRI letter addressed this issue by stating, “The concerns of some developing countries in Copenhagen that any reference to capital markets, as well as private investment and financial resources, in a Copenhagen agreement, would be connected to a possible reduction in public financing and aid-related commitments associated with climate change are, clearly, of great sensitivity.”

But as the PRI letter points out, “Even in the most optimistic of scenarios, the public funds pledged by industrialized countries and channeled into the rest of the world from 2013 onwards, will amount only to a fraction – one sixth to one fifth - of what is actually needed.”

“Estimates suggest that at least 80% to 85% of the finance and capital required in our collective response to the mitigation and adaptation needs of climate change will come from private investment sources and capital markets,” the letter continued.

Clements-Hunt described the expectations of institutional investors as “Realistic. Two paragraphs of language were crafted to be included in an agreement at Copenhagen. The wording would have provided no more than a foothold, acknowledging the future role of private investment.”

According to Clements-Hunt, the wording of the two paragraphs was crafted primarily by Murray Ward, formerly the head of the New Zealand Ministry for the Environment's climate change team. The wording reads as follows:

"Recognizing the enormous scale of finance needed for investment in zero and low-carbon infrastructure and systems in developing countries, in particular to achieve a transition to low-carbon and climate change resilient economies in the coming decade;

"Recognizing that public sector interventions and involvements in capital markets can catalyze and accelerate large scales of additional finance from the private sector that is measurable, reportable and verifiable;

"Encourages Parties to report, pursuant to agreed modalities for such reporting, on where their interventions and involvement in capital markets have catalyzed finance and investment in developing countries by the private sector that is measurable, reportable and verifiable;

"Requests Parties to encourage their senior climate change and finance ministry officials to engage in appropriate forums with leading institutional and private investors, financial experts and industry representatives to develop ideas that can lead to the level of scale-up of finance for investment in zero and low-carbon infrastructure and systems in developing countries that is needed to achieve a transition to low-carbon and climate change resilient economies in the coming decade; and to report on the progress of such efforts to the Conference of the Parties at its sixteenth session."

The acknowledgement was not included in the final wording of the agreement reached in Copenhagen.

The only references to private investment included in the agreement stated, “We decide to pursue various approaches, including opportunities to use markets, to enhance the cost-effectiveness of, and to promote mitigation actions.”

The agreement further stated, “Funding (for climate change adaptation by developing nations) will come from a variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.”

The PRI letter anticipated such a lack of recognition by stating, “It is the extent to which a prospective Copenhagen agreement frames future public financing mechanisms and encourages innovative public-private investment approaches, as well as providing pro-investment signals, that will determine its relevance as a policy framework that frees up flows of private capital, at scale, into climate change mitigation and adaptation in both developed but especially developing countries.”

The letter continued, “It appears that, at best, the role of capital markets, private finance and the importance of the vast concentrated pools of savings held in trust by institutional investors, has a most tentative foothold in the collective thinking of negotiators within the COP15 discussions. At worst, private investment mechanisms and capital markets may not be referenced in a COP15 agreement, or subsequent agreements, for reasons of political expediency.”

Subsequent United Nations meetings on climate change are planned for Bonn and Mexico in 2010.

“We still want the acknowledgement, whether in Bonn or Mexico,” Clements-Hunt said. “The public policy process has to acknowledge the role of private capital in addressing the risks and opportunities of climate change.”


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