Trump and Paris: What Impact on Climate?

President Trump’s decision to withdraw the United States from the Paris Agreement triggered a strong response from the international community, and many foreign leaders quickly denounced the decision and vowed to maintain or increase their nations’ efforts. China and the European Union have announced a new alliance to lead on climate issues. In addition, U.S. states are forming alliances with other nations, with California Governor Jerry Brown traveling to meet with Chinese President Xi Jinping and sign climate partnerships with local Chinese leaders. Governor Brown also participated in an event for the Under 2 Coalition, a group of subnational actors in 33 countries committed to reducing carbon emissions, which he led California to establish in 2015. Yet the loss of U.S. federal leadership is still daunting. Other world players are looking to fill this leadership gap, including new French President Emmanuel Macron who has invited American climate scientists to continue their work in France.

Impacts on U.S. Emissions

U.S. leaders in the private sector and in state and local government are pressing forward. As David Victor notes for the Brookings Institution, the loss of U.S. federal leadership makes the path to achieving the Paris Agreement’s goals harder to achieve, but not impossible. Rhodium Group’s modeling showing the annual emissions projections,  shows that the systematic dismantlement of climate policy by the Trump Administration makes it impossible for the US to attain its 26-28% emissions reduction target. However, uncertainty from a range of other factors, including energy markets dynamics (oil and gas prices in particular) and the health of the economy could drive large variations in emission trajectory, compounding the policy uncertainty around the fate of climate policy and programs targeted by Republicans.

Rhodium Group projections of U.S. greenhouse gas emissions

Even before the Paris Agreement announcement, the administration had worked to impede the nation’s effectiveness on climate issues. Among many other programs in the line of fire, the ability to monitor carbon emissions, with budget cuts proposed to severely limit the Environmental Protection Agency’s Greenhouse Gas Inventory, and eliminate the National Aeronautics and Space Administration (NASA)’s Global Carbon Monitoring program. The loss of these tools would critically undermine the U.S.’ ability to implement and enforce emissions regulations.

Impacts on Adaptation and Resilience Funding, Domestically and Internationally

As part of the withdrawal, Trump announced that the U.S. would end its payments to the Green Climate Fund, falsely claiming that “nobody even knows” where the funding for developing nations is ending up. Yet the fund, which aims to support equally climate mitigation and adaptation projects, fully details 43 projects currently funded from the $10+ billion pledged. By ending its payments, the U.S. cuts $2 billion in expected funding, a serious blow to the fund. It is yet to be seen if other nations will increase their pledges to fill this gap. Trump’s proposed budget will cut grants and funds for the National Oceanic and Atmospheric Administration (NOAA), Department of Housing and Urban Development (HUD), and close to 50% of the EPA’s scientific research programs budget. The proposal belies previous administration claims that their EPA plans would return environmental responsibilities to states, as the budget reduces “state grants for air and water programs by 30 percent.” Other budget cuts may target innovation and fundamental research with cuts for ARPA-E and the Department of Energy.

New U.S. Coalitions Form to Support Paris Agreement 

Though funding to climate programs are at risk, leaders of U.S. cities and states are forming alliances to voice their commitment to achieving the nations’ contributions even without federal government support. The U.S. Climate Alliance, which was formed by the state governors of Washington, New York, and California, is comprised of 13 states and territories make up the alliance representing 35.9% of the country’s population.

The We Are Still In movement, which is led by Michael Bloomberg, seeks to allow subnational entities formally to submit reports on progress to the United Nations Framework Convention on Climate Change, raising questions of whether and how the Framework should allow subnational actors to participate. More than 1200 mayors, governors, college and university leaders, businesses, and investors have pledged to continue to support climate action to meet the Paris Agreement through the We Are Still In; Four Twenty Seven is proud to join these efforts as a signatory.

The effect of these new coalitions is yet to be seen, but the signal they send to other nations and advocates around the world is critical to cushion the blow from the withdrawal of the world’s second largest emitter from the Paris Agreement. The rest of the world has sent a clear signal that they remained committed to fighting climate change, with European leaders, Indian Prime Minister Modi, and Chinese Premier Xi in particular reiterating their commitment in the days that followed the announcement by Donald Trump.

What Now?

The Trump administration has brought new levels of uncertainty to climate policy in the U.S., but efforts to tear down regulatory programs are more likely to create continued confusion and delays than to deal a final blow to efforts to reduce emissions. The greatest uncertainty, however, comes from the broader policy and political context, the ability of the administration to carry out its agenda, and the impact of its proposed policy on the economy.

Meanwhile, many cities and corporations are galvanized. Their efforts to compensate the policy shifts at the federal level will not be enough to make up for the lost budget and policy ambition, but it will ensure the U.S. does not trail too far off its international commitment and keeps an informal but critical presence on the global stage.

New EU Directive Requires Pension Funds to Assess Climate-related Risks

EU FlagOn December 8th, 2016 the EU adopted a new regulation regarding Pension Funds, the IORP II Directive — the successor of the Institutions for Occupational Retirement Provision Directive adopted in 2003. The directive’s main objectives are to enhance pension funds’ governance, risk management and supervision, and to facilitate cross-border activities.

A key feature of the directive is the consideration of environmental, social and governance (ESG) factors as part of pension providers’ investment. In particular, pension providers are now required to carry out their own risk assessment, including climate change-related risks, as well as risks caused by the use of resources and regulatory changes.

Moreover, the Directive explicitly allows pension funds to take into account ESG factors in investment decision-making, within the ‘prudent person’ rule. This comes as an important clarification as fiduciary duty is often cited by investors as a reason they cannot pay more attention to ESG issues in investment processes.

The implementation of the Directive

IORP II applies to all the 14,358 registered EU pension funds, among which 160 have cross-border activities.

Member States (EU countries) have until January 13, 2019 to transpose IORP II into their national law, which was published early January in the Official Journal of the European Union. According to current projections, the implementation deadline should therefore fall before Brexit, an important fact considering that the UK accounts for 50 percent of the EU occupational pension fund sector, followed by the Netherlands (33 percent).

A new risk assessment covering climate-related physical risks

The risk assessment is to be carried out every three years or after any significant change in the risk profile of the pension funds “in a manner that is proportionate to their size and internal organization, as well as to the size, nature, scale and complexity of their activities”.

The assessment must cover “new or emerging” risks, “including risks related to climate change, use of resources and the environment, social risks and risks related to the depreciation of assets due to regulatory change”.

The Directive’s preamble invites EU member states to use the Principles for Responsible Investment (PRI) as a reference for ESG and climate change-related reporting requirements and states that “the relevance and materiality of environmental, social and governance factors to a scheme’s investments and how they are taken into account should be part of the information provided by the scheme under this directive”.

While physical impacts of climate change are not mentioned in these terms, the inclusion of risks related to climate change, use of resources and social risks clearly point to the inclusion of physical impacts, in addition to regulatory and energy transition risks. National transpositions might provide more explicit guidance.

Beyond compliance considerations, pension funds are particularly exposed to climate risks given their long-term investment profile. The longer an asset manager’s time horizon, the more climate-related risks increase. As pension funds also tend to be particularly risk-averse, taking into account climate-related risks is crucial for effective risk mitigation. In 2015, the Economist Intelligence Unit valued the average expected loss as a result of climate change across scenarios as $4.2tn in financial assets.

Considering that EU pension funds now manage more than €2.5 trillion ($2.65 trillion) in combined assets, the assessment of physical climate risks will require considerable effort to access raw climate data at asset level, select appropriate indicators, and interpret the output.

Climate-related regulatory efforts gaining momentum

The adoption of this new climate risks mandatory disclosure at EU-level follows the adoption of an pioneering climate risk reporting law for asset managers and asset owners in France, discussed in a previous post, and occurs almost concomitantly with the release of the Task Force on Climate-related Financial Disclosures (TCFD) Phase II Report discussed  in a policy brief and a webinar.

European central banks and financial regulators are increasingly aware of the threat to financial stability of sudden market adjustments caused by climate-related risks. The concern is that the scale of impacts would pose a systemic risk to the financial system as a whole. A growing number of public institutions are paying attention to this issue including De Nederlandsche Bank; the Bank of England; Finansinspektionen; the SEC and the ESRB.


Four Twenty Seven helps investorsFortune 500 companies and government institutions understand how to quantify and monetize climate change impacts on operations as well as social factors that affect their value chain. Our clients rely on Four Twenty Seven’s tools and models to factor into financial and operational planning processes. Learn more about how we are helping our clients assess and adapt to climate risks.

 


You can find the full text here and the impact assessment made by the European Commission here

A handbook by Lane, Clark & Peacock on the IORP II

 

Art. 173: France’s Groundbreaking Climate Risk Reporting Law

National Assembly, Paris, FranceIn the fall 2015, in the run up to COP21, France became the first country to pass a law introducing mandatory extensive climate change-related reporting for asset owners and asset managers, the Energy Transition Law and its now famous Article 173.

The reporting obligations set out under Article 173 and its implementing decree have potentially far-reaching implications, requiring institutional investors to report on the integration of both physical risks and ‘transition’ risks caused by climate change on their activities and assets.

Whom Does Article 173 Apply To?

Article 173 addresses publicly traded companies, banks and credit providers, asset managers and institutional investors, the latter being listed as insurers, pension or mutual funds and sovereign wealth funds, with differentiated reporting obligations depending on their size and nature.

The law applies to French companies, meaning that French subsidiaries of large financial groups are potentially subject to requirements that do not apply to their parent companies.

What Must the Climate Change-Related Reporting Include?

A comply or explain approach

The law provides investors with broad flexibility in choosing the best way to fulfil the objectives, based on a comply or explain approach. It does not impose any specific method, giving leeway to find the reporting methodology suiting best the investment portfolio, for example reflecting specific asset classes or subsidiaries. However, investors must provide information and justification on the methodology used. They are encouraged to draw from current best practices. An assessment of the implementation will be carried out after two years, at the end of 2018, and the best-in-class approaches will be promoted.

Differentiated requirements

Banks and credit providers will be subject to regular stress tests including a climate change component.

Publicly traded companies’ annual reports must disclose the financial risks related to the effects of climate change, the measures adopted by the company to reduce them and the environmental impact of the company’s activities and of the use of goods and services it produces.

Asset managers managing funds below 500 M€ and institutional investors with balance sheets below 500 M€ must report on the implementation of their ESG policies.

Asset managers managing funds above 500 M€ and institutional investors with balance sheets above 500 M€ are subject to extended climate change-related reporting obligations (besides their ESG policies). Those obligations are two-fold:

  1. Assessment of the portfolio’s exposure to climate change-related risks, including both physical risks (physical impact of climate change) and transition risks (impact of the transition to a low-carbon economy).
  2. Assessment of the investor’s contribution to meeting the international and national low-carbon goals, including the low-carbon targets set by the the investor itself and the actions taken to achieve these targets.

While Asset management companies have to report separately on each of the above 500 M€ funds they manage, institutional investors must provide a consolidated reporting on their assets.

Note that institutional investors may have a commercial relationship with asset management companies via dedicated funds and/or management mandates. Therefore, asset management companies may be directly or indirectly affected by Article 173, via their institutional investor clients. The terms and conditions of access to ESG information required by institutional clients to meet their own Article 173 reporting obligations are to be defined in the contractual relations between them and the asset management companies involved.

Though investors are free to choose which exact data to report, the implementing decree suggests including the following information:

  • The consequences of climate change and extreme weather events on the assets
  • Changes in the availability and price of natural resources
  • Policy risks related to the implementation of national and international climate targets
  • Measures of past, current or future emissions of GHG (both direct and indirect)

As mentioned above, all assessments must come with an explanation and justification of the methodology used.

As of now, 60 institutional investors are subject to the latter reporting requirements.

The Assessment of Climate Change-Related Physical Risks

What really makes Article 173 groundbreaking is the reporting obligation on climate change-related physical risks. The inclusion of physical impacts of climate change in a financial risk analysis is in line with the industry-led Task Force on Climate-related Financial Disclosures (TCFD) recommendations report, released on December 2016 and discussed in a policy brief and a webinar.

While traditional climate-related reporting focuses mainly (if not exclusively) on the impact of the organization’s activities on climate change, the French Energy Transition Law is truly pioneering as it also emphasizes the impact of climate change on the organization’s activities and assets. This new focus meets the demand of investors for enhancing financial risks assessment through taking better account of climate-related risks.

A Ripple Effect

The French government is hoping for a ripple effect, both internationally and on a national level, across the investment value chain. The service providers of eligible investors are already considering how to enhance their ESG and climate reporting practices in order to meet their clients’ demands and comply with the law.

Moreover, climate-related regulatory efforts are gaining momentum. Article 173 is expected to be the first of a series of national equivalent regulatory frameworks among the G20 countries. The TCFD was established shortly after the Law passed, at the December 2015 G20 summit, and explicitly offers its guidance for compliance with Art. 173.

In March 2016, the Dutch central bank DNB announced it was taking steps to monitor and mitigate climate risk. Last November, the European Union has issued a directive requiring all EU-based pension funds to assess for climate change risk.


Four Twenty Seven helps investorsFortune 500 companies and government institutions understand how to quantify and monetize climate change impacts on operations as well as social factors that affect their value chain. Our clients rely on Four Twenty Seven’s tools and models to factor into financial and operational planning processes. Learn more about how we are helping our clients assess and adapt to climate risks.


Documents
A handbook on Article 173 published by the French SIF

By Delphine Ly, Climate Analyst at Four Twenty Seven

From Policy to Markets: the New Climate Agenda

The election of Donald Trump as President of the United States comes at a time where the world needs more engagement in climate policy, and threatens to derail the world’s efforts to keep global warning below 1.5oC. Financial markets’ interest in low-carbon and resilience finance can help counter-balance the expected scaling back of U.S. engagement.

Trump’s Climate Agenda

Myron Ebell, a well-known climate denier, is on Trump’s shortlist for nominees to the EPA.
Myron Ebell, a well-known climate denier, is on Trump’s shortlist for nominees to the EPA. Source: New York Times

While Donald Trump as a candidate did not expound much on his views on climate policy beyond calling climate change “a hoax” and promising to revive the coal industry in the U.S., the Republican agenda on climate change is well established. Trump’s short list of potential nominees for EPA and Dept. of Energy seems to confirm his alignment with the most conservative aisle of the Republican party on all things climate and environment. We expect the impact of the Trump administration on climate policy to be three-fold:

First, we anticipate a hard stop or slow down of U.S. efforts to reduce greenhouse gas (GHG) emissions, starting with the Clean Power Plan, mired in court since 2015, but also including other environmental regulations on air, water and land conservation. The incoming administration will likely face legal challenges since the Supreme Court mandated the EPA to regulate GHG emissions under the Clean Air Act, but these typically unfold over years and the EPA can also count on industry-led lawsuits to help bring down some existing or in progress regulations.

Second, we expect a sharp budget cut for the EPA, but also for development aid related to climate change (the U.S. is an important contributor to development finance institutions like the World Bank and the Inter-American Development Bank) and grants and subsidies to support local government. The Obama White House has been instrumental in providing concrete support and resources on adaptation and resilience, in particular with the Climate Data Initiative and the Climate Resilience Toolkit – the future of these programs is now called into question. Trump may also consider cutting funds for critical agencies like NOAA and NASA, which could impact long term climate data collection and analysis, similar to what was experienced in 2013 with the ‘sequester’.

Third, the U.S. will likely shift from being a driving force for a strong global climate agreement to becoming a negative influence, that may provide an excuse for other countries to slow down their own efforts. While the future of the Paris agreement is not called into question even if the U.S. withdraws, the effectiveness of multilateral efforts will be undermined by the absence of the second largest emitter in the world at the table. It is unclear at this point if the EU and China can and will jointly take over that leadership role, but together they could provide a stabilizing influence and governments in both regions take climate change very seriously.

Market Forces At Play

However, many analysts have noted that even without policy support going forward, the transition to the low-carbon economy is already well underway. Trump is unlikely to succeed at reviving the coal industry with low natural gas prices, and renewables and low-carbon technologies have largely reached the point where they compete effectively with fossil fuel sources. Financial markets are providing steady support for new renewable and energy efficiency projects, with over $65.5B worth of green bonds issued in 2016 YTD.

The world needs to step up adaptation finance by over 400 percent.
The world needs to step up adaptation finance by over 400 percent. Source: WRI

The private sector’s support is also going to be needed for adaptation and resilience. Disengaging from climate policy at a time where each year breaks new heat records, and 2016 is already locked into being the hottest year ever on record does not bode well for the future. Mercer estimates climate change will cause $1.5 trillion of potential impact of climate on returns for portfolios, asset classes and industry sectors, and impacts on communities and human welfare will be even more devastating.

UNEP estimates the financing needed for adaptation will be at least $100B a year, while current adaptation funding from multilateral organizations hovers around $25B a year. While there is a strong consensus over the need to bring more private capital into adaptation and resilience investments, meaningful flows are yet to materialize.

Mobilizing Private Capital for Adaptation

In this context, the discussion paper released today by the Global Adaptation and Resilience Investment (GARI) working group brings welcome insights into how investors see opportunities and barriers to adaptation investments. GARI was launched at Paris COP21, in conjunction with the UN Secretary General’s A2R Climate Resilience Initiative, to bring together private investors and other stakeholders to focus on the practical intersection of investment and climate adaptation and resilience. At COP22, GARI released Bridging the Adaptation Gap, a discussion paper that summarizes the discussions of over 150 private investors and other stakeholders in 2016.

The paper confirmed a high level of awareness among participants, with 70 percent of private investors surveyed declaring they see both risk and investment opportunity from the impact of climate change. Seventy-eight percent of respondents thought evaluating the physical risk from climate change was “very important,” and over 60 percent confirming that they were already, in fact, considering climate risk in their investment portfolio. The lack of a common approach to measuring climate risk, however, was identified as a critical barrier, with respondents calling for a transparent, practical approach to assess physical climate risk.

Where are the investment opportunities in adaptation? GARI maps the opportunities in key sectors. Source: Bridging the Adaptation Gap discussion paper.
Where are the investment opportunities in adaptation? GARI maps the opportunities in key sectors. Source: Bridging the Adaptation Gap discussion paper.

GARI also brought attention to investors’ interest in opportunities for investments in adaptation and resilience. Seventy percent of participants indicated they would consider making investments that supported adaptation to climate change or climate change resilience now. The paper catalogs various investment types, including existing infrastructure, corporate, and fixed asset investments that support adaptation and resilience to climate change. Over 60 percent of respondent investors are considering investments today in resilient infrastructure and in companies whose products address the impact of climate change on water, agriculture, healthcare, energy, and financial services.

Conclusion

The engagement shown by GARI participants, which includes some of the largest financial institutions in the world, opens the door to bringing private investors into a number of adaptation opportunities in need of funding, such as developing and deploying new and existing technologies to help deal with the effect of drought in agriculture, better flood prevention, resilient retrofits to infrastructure and cool, efficient housing.

Not all adaptation projects are suited to private sector investments however, and banks will not replace governments in investing in social capital, development projects and lifting the most vulnerable out of poverty. But leveraging and guiding financial flows towards projects that enhance economic and social resilience create a win-win opportunity and a powerful way to continue to make progress towards a low-carbon and resilient world in spite of political headwinds.

by Emilie Mazzacurati

Tipping the Balance: US and China Ratify Paris Agreement

Late Friday night, China and the U.S. announced that they formally joined the Paris Agreement. This momentous announcement tips the balance towards a quick entry into force of the Agreement, by the end of 2016 — if not by the end of September.

The Paris Agreement requires 55 percent of the 180 signatories to ratify or formally join, representing more than 55 percent of global emissions. The UNFCCC ratification status tracker, last updated as of Friday afternoon, counted 26 parties accounting for 39 percent of emissions.

26 Parties have ratified of 197 Parties to the Convention. Accounting for 39.06% of global GHG emissions.
Source: UNFCCC (accessed September 6, 2016)

China and the U.S. together are responsible for over 38 percent of global emissions, so their commitment pushed the emissions from signatories to 75 percent, well over the 55 percent threshold. Securing the missing 27 country signatures will be not a problem now that the U.S. and China have confirmed their commitment. The next wave of ratification is expected later this month, as countries gather in New York City for the annual General Assembly of the United Nations on Sept. 19.

Paris Agreement signed by President Barack Obama
Source: whitehouse.gov

The Paris Agreement announcement came late at night, on the eve of a long holiday weekend in the U.S., indicating that the Obama administration was eager to avoid media attention and not turn this decision into a presidential campaign talking point. The administration has consistently argued that the Paris Agreement was not a treaty since it did not impose any legally-binding constraint to the U.S. This interpretation ruffled feathers in Europe at the time the document was negotiated in late 2015, but enabled the administration to proceed with formally ‘joining’ the agreement with a signature from the President, without having to submit the document to ratification of the Senate.

Senate ratification (or lack thereof) had been the kiss of death for the Kyoto Protocol, and U.S. climate negotiators were intent to avoid involving the Republican-controlled Senate, which would undoubtedly oppose ratification. This accelerated procedure does, however, make the future of the Paris Agreement fully dependent upon the next U.S. President, since that same signature can be undone just as easily. Hillary Clinton has committed to pursuing current efforts from the White House to reduce GHG emissions and build resilience, while Donald Trump has made contradictory statements about climate science and announced he would pull out of the Paris Agreement if elected. Given current polls and forecasts for the November 2016 elections, we expect the U.S. will stand by its commitment to the Paris Agreement for the next four years.

Will It Be Enough?

The quick entry into force of the Paris Agreement is critical for many reasons. First, reducing emissions aggressively and early-on is the most effective way to prevent catastrophic impacts from climate change. Many scientists consider the commitments under the Paris Agreement to be insufficient to stop climate change. These commitments, known as “Intended Nationally Determined Contributions” (INDCs – or NDCs, without the “intended” for contributions announced after December 2015), are due to be updated every five years, which leaves the door open to more aggressive emission reductions in the future.

A joint study from the University of Maryland and the Pacific Northwest National Lab showed that the current emission reduction commitments, denoted “Paris – Continued Ambition” on the chart below had only a 50 percent chance to keep global warming under 2 degrees Celsius. Countries would have to increase their policy ambitions and reduce emissions much more drastically to have a shot at keeping global warming in the 1.5-2-degree range. The 2 degrees of global warming threshold is considered by a majority of climate scientists the upper limit for global warming to avoid severe and irreversible consequences.

Emissions pathways and temperature probabilities
Source: UMD and PNNL joint study, Dec 2015.

The other reason for which a quick entry into force of the Paris Agreement could be a game changer is the amount of adaptation finance it could help unlock. The Agreement sets a goal of mobilizing $100 billion a year between 2020-2025 in climate finance, both for mitigation and adaptation. This money is much needed to engage in ambitious adaptation projects in developing countries, where the impacts of climate change are expected to be most harmful.

Towards Marrakech

Climate policy remains high on the agenda for global leaders — from the Paris Agreement to the G20 statement this weekend, which ‘reaffirmed’ the G20 countries’ commitment to address climate change through emission reduction policies and climate finance. The announcement from the US and China paves the way for growing momentum ahead of the next Conference of the Parties (COP 22) in Marrakech, Morrocco, with a renewed focus on implementation and adaptation.

What Brexit Means for Climate

Reposted from The Huffington Post, The Blog, view it on HuffPo HERE.

Image courtesy: Free Range Stock, photographer Daniel J Schreiber “London Landscape"

BOTTOM LINE

  • In the short run, Brexit means, at the very least, delays and complications in the process towards the ratification of the Paris Accord.
  • The financial volatility caused by the referendum’s outcome could distract the worlds’ financial regulators and have a negative impact on current efforts to better regulate climate-related financial disclosures.
  • Looking ahead, the incoming Eurosceptic government in the UK is unlikely to make climate change its priority, depriving global climate negotiations from a leader and political engine towards more ambitious GHG cuts.
  • In a worst case scenario, a full-blown global economic crisis would set back investments in clean energy, cut budget for both mitigation and adaptation efforts, and fuel further discontent from the middle-class and the unemployed.
  • Over the long run, a possible “contagion” effect enabling populist victories in upcoming elections in the US, Spain, France or Germany over the next 12 months could further hamper the enactment of effective global climate policy.

ANALYSIS

Political Implications: Impact on the Paris Accord

The only certainty regarding the impact of Brexit on climate policy comes from the extensive political uncertainty and financial volatility the referendum outcome has triggered. As the political debate turns towards the process for the UK to exit from the EU and deepening internal tensions between the UK and the “pro remain” constituents within Scotland and Northern Ireland, this uncertainty will at a minimum cause a temporary slowdown of the ratification process of the Paris Accord.

The ratification process was already expected to be long and complex for the EU. Each country has to approve the ratification domestically before the EU as a whole ratifies the accord. In the context of such a lengthy process, we think it is highly unlikely the lame-duck Cameron government would stick its neck out and push for a rapid ratification of the accord in the next three months, before its scheduled October departure. It is unclear how the UK will affect the EU ratification process during the two years preceding Britain’s formal exit from the EU.

This leaves the next government in charge of a possible ratification. Leading candidate for British Prime Minister, Boris Johnson, and the UK Independence Party leader Nigel Farage, who are credited with driving the success of the Leave vote, both do not believe in or prioritize climate change, casting a shadow of uncertainty over whether the UK might actually ratify the Paris accord at all.

However, the Paris Accord requires the ratification from 55 countries representing 55 percent of global emissions to come into forces. A refusal from the UK to ratify would send a negative signal but a single country representing 2 percent of global emissions would not bring the global process to an end. While the UK has historically been a driving force in global and EU climate negotiations, we expect the new UK government will at best be a follower, at worst a laggard and opposing force in global climate policy.

Beyond Britain: The Rise of Populism

While the direct political implications of the referendum on UK climate policy are quite predictable, we cannot rule out a potential ripple effect on the willingness from other countries to ratify the Paris accord. More generally, the UK vote signals that current populist trends in the world’s largest economies – U.S., France, Germany in particular – could bring a deep reshuffling of cards for climate policy. Populists parties are typically lukewarm, if not outright opposed to climate policy and global agreements, as illustrated by the so-called Trump Trajectory in the U.S.

A rise in climate-sceptic governments could bring to a halt the progress brought about by the Paris accord and set us back toward a high carbon emission pathway. At this point in time, however, we believe most governments have a robust understanding of the seriousness of the issue of climate change, and will do their best to proceed with the accord ratification and with meeting their targets.

Financial Implications: Impact on Efforts to Regulate and Price Climate Risk

A very immediate impact from Brexit-induced financial volatility and risk of recession will be felt on efforts to better understand, regulate and price climate-related risks on financial markets. The very institutions and individuals that have been leading this effort globally – the Financial Stability Board and its Chair, Mark Carney, who is also the Chair of the Bank of England, as well as to some extent the Securities and Exchange Commission in the U.S., are going to be entirely focused on preventing a complete collapse of the British economy and a global recession. This will necessarily cause distraction away from the recent efforts to push climate change higher on the agenda of financial decision-makers.

Assuming the world’s financial leaders are successful in preventing a global recession and the volatility of financial markets continues, we expect the discussion to resume and allow the recommendations from the Task Force on Financial Climate-Related Disclosure to garner the attention needed from global financial regulatory bodies.

However, if Britain’s decision to leave the EU were to cause continued turmoil on financial markets around the world, leading to a major recession, the impacts on climate change policy could be extensive, and mostly negative. Recessions in general are bad for the environment because jobs and financial volatility typically take precedence on the political agenda over environmental regulations and climate policy, often perceived as putting added burden on the economy. A global recession could lead to budget cuts and increased contention over energy and climate budgets, and otherwise lead to a scale back of efforts to reduce emissions.

Financial instability also means a setback for investments in clean energy, with financial flows likely to flock towards safe havens (U.S. bonds, gold) and away from riskier investments.  Expectations of trade financing faltering, credit spreads narrowing, emerging markets assets under serious stress and a worse-than-expected earnings season, impacting equity valuations all point to less money for adaptation in developing countries and a further slowdown in renewables investment levels.

Conclusion

The UK’s decision to leave the EU puts both financial markets and climate policy to the test. Financial markets were still slowly recovering from the second greatest recession in the history of modern markets, and this is where the main uncertainty stands at the time of writing. Short term volatility may bring distractions but unlikely to drive a meaningful change of course away from greater climate risk disclosures. If continued economic turmoil materialized, it could slow down investments in clean energy and put climate and environmental issues on the back burner once again.

By Emilie Mazzacurati and Camille LeBlanc

Image courtesy: Free Range Stock, photographer Daniel J Schreiber “London Landscape”

 

Insights in Resilience: International Adaptation

We asked our Director of Advisory Services Yoon Kim, about her work on international adaptation and for insights from her recent trip to the 2016 Adaptation Futures Conference in Rotterdam Netherlands.

1. Tell us about your work supporting the US Agency for International Development’s (USAID’s) national adaptation planning efforts and your recent publication on this topic.

In the international arena, we’re currently seeing a shift from a focus on immediate adaptation needs to a more strategic, longer-term approach to adaptation planning. Working closely with USAID’s Adaptation Team, I facilitated the mainstreaming of adaptation into planning and decision-making in developing countries through the implementation of high-level, cross-sectoral stakeholder workshops. These workshops sought to catalyze the development of national adaptation plans (NAPs) as described under the United Nations Framework Convention on Climate Change by demonstrating USAID’s approach to climate-resilient development, building broad buy-in and support for the NAP process, and identifying opportunities for cross-sectoral coordination and collaboration. To capture and share lessons learned from USAID’s experience implementing NAP stakeholder processes in Jamaica, Tanzania, and 11 coastal countries in West Africa, I led the development of a paper on USAID’s experience facilitating NAP processes, which was published in Climate and Development earlier this year.

2. What are some of the lessons learned from early NAP processes in developing countries?

Climate change does not respect sectoral or geographic boundaries. So, it is critical to engage key sectors as well as ministries, departments and agencies, including more powerful entities, such as the finance ministry, from the outset. Early and continuous engagement helps to promote ownership and buy-in for the adaptation process and facilitates coordination. The support of a powerful entity such as the Prime Minister’s or Vice President’s Office can also help to build support and motivate action.

Mainstreaming also tends to be more effective when one starts with an existing planning process and considers how climate change may affect it. For instance, in Jamaica, linking adaptation efforts to the country’s long-term development plan, Vision 2030 Jamaica, helped to make adaptation relevant to sectoral stakeholders and to demonstrate how adaptation planning could complement existing planning efforts.

3. You were just at the 2015 Adaptation Futures conference in Rotterdam, Netherlands. What was your key takeaway?

I was heartened by the range of adaptation efforts taking place in key sectors such as health, urban resilience, and disaster risk reduction. However, I also saw a couple of key gaps regarding financing and the private sector. As more jurisdictions move from vulnerability assessments to adaptation planning, it becomes increasingly urgent for them to identify a set of appropriate funding sources and mechanisms and to understand how best to apply them. While there is important work being done by a number of donors, research institutes, and non-governmental organizations on these issues, there is still a need to map financing options, both in terms of sources and potential mechanisms (e.g., bonds, taxes), and to link them to demonstrate sectoral and location-specific applications. Doing this successfully will require dialogue across international, national, and subnational levels and consideration from the outset of how funding will be accessed and utilized.

Regarding the private sector, we often refer to them as an undifferentiated block. However, to engage them effectively, we need to unpack this term and develop a more nuanced understanding of who we mean by the “private sector” in a given context. Four Twenty Seven has found in its work with different private sector entities that the needs and concerns of financial institutions differ significantly from those of manufacturing companies which in turn differ from healthcare providers. This differentiated understanding is critical for being able to identify entry points for engagement that not only speak to what these entities care about but also opportunities to leverage competitive advantage to develop solutions.

From Data to Action: Climate Adaptation in 2015

I remember 2014 as the year of climate science. The unfolding of the IPCC Fifth Assessment Report, and, in the US, the publication of the National Climate Assessment and the first Risky Business report brought to new levels our collective understanding of how devastating climate change would be for human and natural systems.

2015 saw growing recognition of the economic risk brought about by climate change – coming not just from the community of dedicated climate activists that have been raising the alarm for years, such as C2ES, Ceres’s Investor Network on Climate Risk (INCR), and the CDP, but this time coming from the world’s largest and most influential financial players.

Financial Risks of Climate Change
Mark Carney, describing the financial risks of climate change as “the tragedy of the horizon.”

A few key reports stand out: Mercer’s study on Investing in a Time of Change, Standard and Poor’s warning of climate change impacts on corporate and sovereign risk ratings, and Bank of England Governor Mark Carney’s famous speech on the “tragedy of the horizons.” All these studies, punctuated by a slew of catastrophic extreme weather events across the globe, point to the devastating systemic costs to our economies and our communities if we do not better prepare and adapt to climate change.

This alarm is starting to turn into action and concrete steps. Just in the past weeks, the Financial Stability Board, also headed by Mark Carney, announced an industry-led task force headed by Michael Bloomberg to develop voluntary, consistent climate-related disclosures in financial markets. The United Nations announced a private sector Working Group headed by private equity firm SigulerGuff to mobilize private sector investment in climate adaptation and resilience. The United Nations Global Compact and Caring for Climate launched a report providing concrete guidance and a conceptual framework on how corporations can adapt to climate change while helping reduce social and environmental vulnerability. What these initiatives speak to is the need for standardization in how we measure, quantify and disclose climate change risk.

Governments play a critical role in enabling private sector adaptation by providing data and guidance (Photo: Getty).

In the public sector, Governments have a key role to play in supporting private sector-driven initiatives to build social resilience and grow technological and financial solutions. 2015 saw governments treading new waters with regard to climate risk and resilience. In California, Governor Jerry Brown issued Executive Order B 30-15 directing state agencies to identify vulnerabilities by sector and to infrastructure and property. The City of San Francisco established the first-in-the-nation mandate to assess infrastructure risk posed by sea-level rise, promptly echoed by a similar mandate from President Obama for all federal agencies. The White House also worked to empower and challenge the private sector to develop new data-driven tools for climate adaptation through the Climate Data Initiative. And finally, the Paris agreement negotiated during COP21 includes extensive provisions to finance and implement climate adaptation measures.

The challenges ahead of us remain tremendous – deepening our understanding of how to best forecast and quantify social and economic impacts of climate change, measuring progress towards resilience, developing common metrics of success are only the very first steps towards bridging the adaptation gap. I believe 2016 will see critical new developments to help the world prepare and adapt to climate change. We’re ready for the challenge.

Emilie Mazzacurati, December 18, 2015.

COP21: Climate Adaptation in the Paris Agreement

b9f7640e54975ccb-a6ddcAt the 21st session of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change in Paris, France, 196 countries reached a landmark climate change agreement, which for the first time puts in place a regular, iterative process for evaluating progress and enhancing actions.

In 2018, Parties to the Convention will reconvene for a global “facilitative dialogue” to assess collective progress on achieving mitigation targets. This will be followed by a periodic global stocktake to gauge collective progress on mitigation and adaptation goals, including the state of overall adaptation efforts, priorities, and the efficacy and adequacy of support. The first global stocktake will be conducted in 2023; it will then take place every five years. (See the World Resources Institute’s blog for more information.)

The Paris Agreement also seeks to strengthen adaptation efforts under the Convention and, together with the accompanying COP decision:

• Establishes the adaptation goal of “enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change.”

• Calls on countries to carry out national adaptation planning processes, which may include assessing climate change vulnerabilities and impacts to inform prioritization of actions, implementing actions to adapt and build resilience, and monitoring, evaluating, and learning from adaptation plans, policies, programs, and actions.

• Requires each country to submit and periodically update an adaptation communication, which summarizes adaptation priorities, efforts, and support needs.

• Encourages international, regional, and financial institutions to report on their efforts to integrate climate resilience considerations into their development assistance and climate finance programs.

• Urges developed countries to increase adaptation support and extends the timeframe for mobilizing $100 billion annually for climate change from 2020 to 2025; a higher funding target will be set after 2025. Developed countries have pledged $19 billion to assist developing countries, and the US has indicated it will double its support for adaptation to $800 million a year by 2020. Vietnam has also pledged $1 million to the Green Climate Fund, and various subnational entities, including Paris and Quebec, have committed funding to mechanisms such as the Least Developed Countries Fund.

• Requests that the Green Climate Fund provide expedited support to developing countries to prepare national adaptation plans and implement the priority actions identified in these plans.

For questions about international climate adaptation and climate finance, contact our expert Yoon Kim.

 

 

Lima’s Tragedy of the Climate Change Commons

Delegates talk during a break at a plenary session of the U.N. Climate Change Conference COP 20 in Lima December 12, 2014. REUTERS/Enrique Castro-Mendivil
Delegates talk during a break at a plenary session of the U.N. Climate Change Conference COP 20 in Lima December 12, 2014. REUTERS/Enrique Castro-Mendivil

The UN Climate Summit in Lima has been reluctantly considered a success in preparing the world for a global climate action plan to be signed next year in Paris. Despite the recent symbolic accord between the US and China to cut future emissions, developing nations such as China, Saudi Arabia, India, and Brazil took a hard-line stance on the issue of financial climate assistance. A unified front of developing nations successfully maintained language differentiating their role in causing climate change and limiting the burden they will bear in the final agreement.

Secretary-General ban Ki-moon addresses the UN Climate Change Conference in Lima, Peru. UN Photo/Mark Garten
UN Secretary-General Ban Ki-moon applaudes “…important advances” achieved at the Lima COP. UN Photo/Mark Garten

Although this language helped get everyone on board and paves the way for countries to begin making concrete pledges on emissions cuts to be submitted in May of 2015, this stipulation could excuses less ambitious pledges. Another ambiguous success is the removal of the vital review process providing transparency and allowing for direct comparisons between national plans after pressure from China. The talks also punted on whether or not an agreement would be legally binding, a question that will have to be answered in Paris. Nations have six months to submit their national emission reduction targets, to be signed next year at COP 2015.

Discussions at the UN climate talks in Lima, Peru hit familiar hurdles as developing nations demanded increased funding to combat climate change. Developing countries adhere to the argument that the developed world needs to pay more as it is most responsible for historic CO2 emissions that cause climate change. In contrast, the developed world says it is time for up-and-coming economies to begin doing their part in cutting emissions. The developing world was exempt from making emissions cuts in the Kyoto Protocol, but will be asked to share the burden in its successor agreement.

In addition to being less responsible for causing climate change, poorer nations are also generally at greater risk from the impacts of climate change due to their location and lack of resources and resilient infrastructure. Exemplifying this disparity in risk, Typhoon Hagupit barreled through the Philippines last week only one year after the devastation from Supertyphoon Haiyan. This rapid succession of debilitating onslaughts has given the developing nation little time to recover between storms. Due to the lack of resources and a slow bureaucracy, only 6 ports and 3 bridges have been repaired out of the 43 and 34 damaged by the storm, respectively. Although the storm caused less devastation than Haiyan, over half a million people were evacuated and business ground to a halt throughout the archipelago. Climate change is expected to increase the frequency of extreme storms.

Soldiers carry in emergency supplies as normal trade routes are shut down from Typhoon Hagupit. Erik De Castro / Reuters
Soldiers carry in emergency supplies as normal trade routes shut down from Typhoon Hagupit. Erik De Castro / Reuters

Even though Typhoon Hagupit weakened before reaching the Philippines’ coastline, it still had significant and far-reaching effects in the modern global economy. The Philippines is a manufacturing-based economy, exporting semiconductors and electronics, transport equipment, and textiles across the globe. Although tentative estimates of local damage exceed $71 million, real losses are even more significant from flights, cargo shipping, and trucking still affected even a week out from the storm. These disruptions cause a chain reaction impacting supply routes in the US, Japan, China, and Singapore among many others. This example of shared risk and interconnectedness shows the commonality climate change impacts. Reaching a global accord between all nations to limit the effects of climate change and mitigate drags on the global economy needs to be approached with that same commonality in consideration. A problem for one is a problem for all.

The high risk to developing nations contrasts heavily with their limited role in contributing to climate change. The basis for developing nations’ demands for financial assistance in reducing emissions and preparing for and recovering from impacts stems from the premise that developed nations are responsible for up to 80% of total historical greenhouse gas emissions.

The developed world is responsible for as much as 80% of historic GHG emissions, creating a conflict over who should pay for cuts now. Source: Petrolog.
The developed world is responsible for as much as 80% of historic GHG emissions, creating a conflict over who should pay for cuts now. Source: Petrolog.

One counter argument takes the stance that developing nations’ emissions are reduced through the use of modern technology during their current industrialization, which would not have been possible without technological advances resulting from the West’s industrial revolution. However, there is a general understanding that it is time for developing nations to participate in making cuts, the remaining question is simply “How much?”.

In a step towards compromise, wealthy countries have already contributed $10 billion to the Green Climate Fund, which is scheduled to reach $100 billion annually by 2020 to be distributed among developing nations to support concrete climate change mitigation initiatives. Developing nations question the likelihood of reaching this goal and whether it constitutes sufficient financial support to offset the contribution of historical western emissions to climate change.

While the outcome from the Lima negotiations is not ideal, the agreement sets the stage for countries to submit emissions reductions targets ahead of the final negotiations in Paris. The remaining tough questions will ultimately need to be answered, and will ultimately decide the success or failure of a global climate change accord.