Transition to a low (or no) carbon economy

 

 

It can be argued that the world’s biggest contemporary market failure is climate change. It is therefore the role of governments to correct the failure. Government policy is needed through either fiscal measures, market mechanisms or regulatory intervention standards to correct market failures, so finance is a huge part of the solution

 

 

The implications of climate change for the investment industry

 

A policy shock transitioning to a sub two degree economic trajectory too quickly could cost investors in fossil fuels tens of trillions.

According to research commissioned by Aviva and conducted by the Economist Intelligence Unit warming of 5°C could result in US$7trn in losses – more than the total market capitalisation of the London Stock Exchange – while 6°C of warming could lead to a present value loss of US$13.8trn of manageable financial assets, roughly 10% of the global total.

 

 

Why do investors need information on companies’ climate-related exposures?

The world’s institutional investment community has a financial interest, as well as a fiduciary and moral duty to future generations to promote a rapid yet well managed transition to a net zero climate economy.

 

The transition risk, the physical risk and litigation risk will be very material for some sectors.

Better disclosure will enable investors to assess the impact of the three main types of climate risk on their portfolios.

 

Enter the TCFD

 

The encouragement of greater disclosures of the risks associated with climate change should stimulate a considerable growth in climate awareness among the boards of many companies around the world. This, in turn, will help asset managers and asset owners assess and manage climate risks in their portfolio, helping to improve the scale and effectiveness of their engagement with exposed companies in their portfolios. And this, in turn, will help prepare the economy for the transition to a lower carbon footing

 

 

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Blog on Personal Leadership Opportunity

Identification of leadership opportunity

Aviva’s work on climate change goes back over two decades.

  • In 2000, Aviva Investors hosted the first ever meeting of the Carbon Disclosure Project, which has now grown to be a network of investors representing over $100 trillion with offices and partners in 50 countries.
  • We were the first carbon neutral international insurer in 2006.
  • In 2012 we successfully persuaded the UK Government to require all listed companies to disclosure their Greenhouse Gas emissions.

 

As part of Aviva’s Strategic Response to Climate Change from 2015 we made a commitment to divest where necessary. We identified an initial set of 40 companies where Aviva has beneficial holdings and which have more than 30% of their business (by revenue) associated with thermal coal mining or power generation.

We have focused engagement with these 40 companies, setting out our expectations on the governance, business strategy, operational efficiency, responsible climate and energy policy advocacy and crucially whether the company has any plans for new investment in coal generating capacity.

And we are willing to divest where necessary where we do not see progress following our engagement. In 2017, we divested from the Japanese coal company J Power and the Polish coal company PGE.  We have also announced in our climate-related financial disclosure in March that we are in the process of divesting a further fifteen companies from our portfolio.

The challenge

Broadening the scope of the Aviva Strategic Response to Climate Change beyond coal powered utility companies to encompass extreme fossil fuels – energy sources dubbed “extreme” because of their contribution to global emissions. These include oil sands, arctic oil, ultra-deepwater oil extraction, liquefied natural gas export and coal mining.

In the first instance we will engage with the companies in scope to encourage them to tilt their strategy towards a low carbon economy. We will probe into whether the companies are putting new capital expenditure into extreme fossil fuels. If the companies are continuing on a trajectory that doesn’t fit into a 2 degree , post Paris Agreement, scenario then we will divest publically from the company.

Why it is relevant and of personal interest

 

Investors can play a role in driving positive change and helping companies transition into low carbon and renewable energies. We want to use every possible opportunity to mobilise the transition to a low to no carbon economy. The easiest thing in the world is to simply divest. Engaging with a company takes much more time, energy and resources.

Many of the companies we’ve engaged with tell us that we are the first investors to ask questions about their response to climate change. While our conversations have been challenging — and will likely result in additional divestments by Aviva — there is undoubted value in them.

The time has come to broaden the scope of the Aviva Strategic Response to Climate Change by including all extreme fossil fuels as candidates for engagement and possible divestment.

Plenty more fish in the sea?

Bribery, corruption and a rabbit hole of shell companies that would not be out of place in the Paradise Papers often go hand in hand with illegal, unreported and unregulated fishing. Given the rapid and continual decline of fish stocks, many current fishery practices and management systems are simply not fit for purpose and need to be urgently addressed.

Unsustainable production and consumption

Seafood production and consumption presents a major challenge to our ability to manage the earth’s resources sustainably. Fishing effort has often exceeded the ability of fish stocks to maintain themselves and the impact on non-target species (including potentially vulnerable species such as sharks, turtles, and marine mammals) can be severe. The results have often been stark; many fish stocks have declined just when our need for increased food production is greatest and the marine ecosystem has been significantly degraded.

At stake is a multi­billion dollar global industry, one of the oldest in the world.

According to the United Nations1, the livelihoods of over three billion people depend on marine and coastal diversity, and 2.6 billion people count the oceans as their primary source of protein. The market value of the world’s marine and coastal resources is estimated at $3 trillion per year, or around five percent of global GDP.

 

Slipping through the net

Rapid and unchecked expansion has already proved disastrous for the Chilean farmed salmon industry. First gaining public attention in June 2007, Infectious Salmon Anaemia spread quickly through supplies, not helped by large concentrations of salmon pens that facilitated the transfer of the disease. New practices and legislation have been introduced, but this was too late for the farmers that lost billions of dollars in revenue following the contagion.

The European Union (EU) has given Thailand, the world’s third-largest seafood exporter, a ‘yellow card’ telling it to crack down on illegal fishing or face a trade ban on its fish imports. It is the most high-profile action taken by the EU against illegal, unreported and unregulated fishing since 2010 regulations against such practises came into force.

The Thai fishing industry is plagued with human rights abuses and fuelled by trafficked labour from neighbouring Myanmar and Cambodia. In 2014, the US State Department’s trafficking in persons report downgraded Thailand to tier three, the lowest ranking. South Korea and the Philippines though have escaped the commission’s net after bringing in legal reforms and improved control and inspection systems. Unless Thailand cleans up its fishing industry, it faces an embargo on exporting its seafood to the EU. EU vessels could also be prevented from fishing in Thai waters.

What should companies be doing?

The seafood supply chain has significant influence over the behavior of producers and the agencies that regulate them. It is entirely possible for companies to avoid fish that are illegally caught, support well-managed fisheries and fish farms that are certified to credible standards, support the responsible management of aquaculture resources across regions, and encourage fisheries that are trying to improve.

The most important first step that a company can take towards responsible behavior is to formulate and adopt a responsible seafood policy. Such a policy does not entail avoiding poorly managed fisheries and confining procurement to “sustainable fisheries,” but involves a commitment to continuous improvement and transparency with ambitious targets in the future.

What should investors be doing?

Laying early foundations for responsible policies: Investors should work with companies to formulate and adopt a responsible seafood policy from the outset of the association. This should demonstrate a commitment to continuous improvement and transparency, with ambitious targets for the future.

Influencing the supply chain: Investors should encourage supply chain companies to ensure producers avoid fish that are illegally caught; support well-managed fisheries and fish farms that are certified to credible standards; support the responsible management of aquaculture resources across regions; and encourage fisheries that are trying to improve.

Ask material questions: The report sets out questions investors should put to companies to gauge the level of responsibility and sustainability already built into their operations and to ascertain areas for development.

What should consumers be doing?

NGO’s such as the Marine Conservation Society and the Monterrey Aquarium have produced apps that help consumers identify environmentally responsible choices when buying seafood. This knowledge can increase the likelihood of consumers speaking up about their concerns if they spot a threatened species on the menu or at the seafood counter.

Should we be eating fish at all?

As legendary oceanographer Sylvia Earle said in her recent TED talk and Netflix documentary “Except for those living in coastal communities — or even inland if we’re talking freshwater species — for most people, eating fish is a choice, not a necessity. We have seen such a sharp decline in the fish that we consume in my lifetime that I personally choose not to eat any.”