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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.
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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.”
SocialFunds.com 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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