Trying to square the circular economy

With climate change continuing to rise up the political and societal agenda, increasing calls are being made for a global ‘Green New Deal’. Steve Waygood explores what this would look like and why we must start to treat the economy and environment as one.

5 minute read

A city showing the effect of Climate Change

When individuals experience a personal crisis, they face three choices to resolve it: find a new way that will ultimately prove successful; revert to a previous coping mechanism that is inappropriate for the situation; or do nothing.

If nations can be thought of as a collective of individuals, our response to climate change has wavered between the second and the third options, but not yet the first – the one that matters most. The world is on track to warm by three degrees Celsius by 2100, doubling the limit of 1.5 degrees Celsius agreed in the Paris Agreement.1

For any one nation such as the UK, it may be tempting to depend on larger polluters like the US or China to take the lead, especially given pressing domestic political issues.

Britain has been at the forefront of global warming mitigation policies and is well positioned to mobilise a Green New Deal

That would be a grave mistake. Britain has been at the forefront of global warming mitigation policies and is well positioned to mobilise a Green New Deal that integrates resources from various parts of society, including government agencies, financial institutions and individuals. Legislation to commit to a net zero target by 2050 made the UK the first major world economy to enact laws aimed at ending its contribution to global warming. But now comes the hard work.

A good place to start is in finance, in which the UK is a global leader – despite the threat of Brexit to that position.

The International Energy Agency (IEA) estimates we need US$1 trillion each year to move the economy onto a net-zero carbon basis. To put this in context, the Marshall Plan to rebuild Europe after World War II cost US$13.3 billion at the time, or US$103.4 billion in today’s money. Similarly, the Apollo programme cost US$25.4 billion at the time, or about US$150 billion in today’s terms. In other words, we need to mobilise four times the Marshall Plan plus the Apollo programme. Each year.

What does this mean in practice?

This year, the team involved in producing the scenarios associated with Aviva’s own Task Force in Climate Related-Financial Disclosure (TCFD) report were deeply concerned when we were informed by advisors Carbon Delta that the London Stock Exchange is financing a 3.8 degrees shift in temperature. According to Carbon Delta this means that, while Aviva’s portfolios are lower carbon intensity than the market, they are still on average around 3.5 degrees.

The London Stock Exchange is financing a 3.8 degrees shift in temperature

The key question is how can we correct the capital market so that it amplifies rather than undermines the ambition within the Paris Agreement?

Recent years have seen huge progress in the thinking in this area, through work by the United Nations, the World Bank, the OECD, the European Union as well as the national governments of UK, Canada, Norway, China, Singapore and Malaysia.

The UK Treasury’s first ever Green Finance Strategy (GFS) was launched in July and is a good start. It usefully clarified the government’s expectation that all listed firms and large asset owners disclose climate-related financial risks in-line with TCFD requirements. It also includes a commitment that climate-related issues must be a mandated aspect of regulators’ objectives and duties.

Wood from the trees: A plan for affecting change

But the GFS (and equivalents) is not the destination. A bold, and global, Green New Deal is needed. This means we need to call upon every organ of society to take strong action: every government and intergovernmental organisation, every central bank, every asset owner, every regulator, every non-governmental organisation and every individual.

If we do not take urgent action to limit global temperature increases, the impacts upon the economy, society and our business will be nothing short of devastating

Below are a few modest and practical suggestions for what a Green New Deal might require:

1. Create a Global Climate Capital Raising Plan

This plan should coordinate national Capital Raising Plans, which include a view on the infrastructure required, the capital involved, and the financing that can be raised via infrastructure investment, project finance, corporate debt, foreign direct investment, equity investment as well as sovereign and multilateral development bank debt. At the United Nations, there is widespread agreement that the Paris Agreement and the Sustainable Development Goals will require public, private, domestic and international financial and non-financial resources.

However, at the UN High Level Political Forum (HLPF) in New York this July, only a quarter of the Voluntary National Reviews by Member States presented an investment strategy at all. If we are to raise this money in an efficient, effective and sustainable manner, we collectively need to challenge the intergovernmental community to do much, much more.

2. Create an International Panel on Climate Finance (IPCF)

This would be a capital market-focussed equivalent to the International Panel on Climate Change, which focuses on the science base around climate change. It would assess market-based analysis on the impact of climate policy. Observations would be secured from the various market disclosures by companies and investment analysts from various sectors and regions. The report would be issued annually and serve as a market test of policy effectiveness.

3. More focus on the cost of carbon

Carbon pricing internalises the externality that is climate change. While the EU Emissions Trading Scheme is now trading at a more material price, it is still only around ten per cent of what it should be to reallocate capital at a macro level and at the scale required. Invite the Circle of Chief Economists within the Geneva Association to provide a trajectory for a forward carbon price cost curve that would help manage a transition to a lower carbon economy.

4. Central banks

One way for central banks to address climate risks is to help support the production of sector-specific reference climate risk scenarios for corporate boards -- particularly banks, insurers and investors - to see as input and base their own scenario plans upon. This would significantly help the process of scenario planning within financial institutions and assist the comparability of the scenario plan outputs by regulators, which are currently based upon disparate assumptions.

5. Public league tables

Governments should also back public league tables ranking the actual TCFD disclosure reports, sector by sector. For our part, we helped set up and then finance the World Benchmarking Alliance to work with a group of allies including the Carbon Disclosure Project to build climate change benchmarks. The benchmarks will use the new disclosures created by the TCFD as the underpinning framework.

When ready (towards the end of 2020) investors will be able to use these benchmarks to hold companies to account for their roles in climate change.

6. Education

The GFS does not include enough on the role of individuals. Government should provide strong backing for civil society campaigns that would look to mobilise their members. Actions government and non-governmental organisations (NGOs) could jointly take include sustainable finance education initiatives that teach people about the climate impact of their investments. Doing so would change the nature of the supply of capital overall as well as help identify the concerns of investors.

7. NGOs

Capital market campaigns can help correct climate change market failures in a way that ensures companies in general and financial services in particular are presented with the actual market prices that reflect the real costs paid by people and the planet. For example, what about a Producer Responsibility directive that applied to the Fossil Fuel industry, requiring them to pay for the carbon capture and storage of a percentage of the emissions that their products and services create? In the packaging, automobile, electronic equipment and white goods markets, financing the recovery of their product waste has been standard practice for well over a decade.

NGOs should also look to move the considerable influence within finance, so that it focusses on this area more. For example, they could initiate a Global Youth Movement of shareholder activists within the youth community inspired by Greta Thunberg’s strong action on climate change.

8. Individuals

Every pensioner can act, today. We propose three actions: voice, vote, and full disclosure:

  • Tell your fund managers to voice your concern about the Paris Agreement and ask all the companies you own to nominate a board member to be responsible for climate change impact and to require them to publish TCFD impact reports.
  • Tell your fund to vote against the pay, re-election of board members and report & accounts at those companies that don’t respond positively.
  • Tell your fund manager to use the World Benchmarking Alliance (WBA)thereby disclosing to you the climate change impact your funds have had.

If we do not take urgent action to limit global temperature increases, the impacts upon the economy, society and our business will be nothing short of devastating. With Glasgow set to host COP 26 in 2020, and definitely host to the G7 in 2021, the UK has an historic opportunity to lead other member states toward a net-zero financing strategy.

The world now faces a different kind of crisis, one that will require an even more drastic paradigm shift

“Never let a good crisis go to waste,” Winston Churchill was thought to have said about the conditions in the aftermath of World War II that eventually brought about the formation of the United Nations. The world now faces a different kind of crisis, one that will require an even more drastic paradigm shift.

This article originally appeared in Putting people at the heart of the green transition, a publication by the Institute for Public Policy Research.

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