credit: Ore

The UN is trying to make it easy for you to diversify your portfolio away from fossil fuels

Earlier this week, the UN played host to the something called the 2016 Investor Summit on Climate Risk.  The theme of the meeting was straightforward: the institutional investors of the world – pension funds, banks, mutual funds, hedge funds, and the like – have to not just divest from companies that are high carbon emitters but also invest more in renewable energy if we want the Paris Climate Agreement to have its intended effect.

This courting of the private sector and investor class for climate solutions is fairly new for the United Nations. Coupled with last week’s World Future Energy conference in Abu Dhabi, the UN’s growing interest in including the private sector may ruffle a few feathers. Ultimately, it is a positive step in the post-Paris world given the realities of combating climate change.

Where are we headed after Paris?

The bank, first and foremost.

Paris was certainly an uphill battle but ultimately a “miracle,” as head of the UN climate body Christiana Figueres said to several hundred investors gathered at UN headquarters.

It was just the beginning however, especially in the effort to divest from fossil fuels and lessen investment in other companies that have high carbon emissions, beyond the oil and gas sector. Figueres was accurate in her assessment that the financial services industry will really set the pace for where we go after Paris given that the Agreement, according to Michael Lieberich of Bloomberg New Energy Finance, offers nearly $12.1 trillion in investment opportunities.

“You have an extraordinary opportunity to do well and to do good,” she said in what seemed like half-optimistic cheer and half-warning.

Cash rules everything around the Paris agreement, whether that’s something countries and the naive want to admit or not. It will not only take the $100 billion a year after 2020 in mostly public financing that countries pledged back in 2009, but into the trillions. When you take into account  divestment and companies in air, ground, and sea transport, manufacturing plants, textile factories, and several other industries actively changing operations from fossil fuels to more renewable sources, that staggering number starts to make more sense.

However, the potential for profit is also quite high and how countries will be able to justify costs in the long run to help poorer countries with adapting to a changing climate and mitigate their own carbon emissions.

Uncomfortable bedfellows? The UN and the private sector

The relationship between international aid and development is mirrored in the ties between the UN and industry. At first, it may have been fraught and not made any logical sense given divergent priorities: making a profit vs. ending poverty. With growing interest, knowledge, and urgency of climate change – those priorities have come to merge quite a bit. The UN, or at least the UN climate change body, has come to understand the world outside; that continuously demonizing manufacturing companies would never get them to take responsibility for their massive amounts of carbon emissions and certainly not for the climate damage that has caused. This isn’t to say CEOS are benevolent.  It’s that post-Paris they may see some regulations and market trends coming down the road on carbon emissions and environmental impact. They have realized there is profit to be made in renewable energy and potential for real growth in emerging markets.

Where tensions may arise is determining corporations’ social and environmental responsibility – selling solar power services in a developing country without gouging them or violating basic labor rights. The UN has no legal authority here but public relations are a tool they have not been afraid to use in the past and civil society observers of the UN climate body are a vigilant lot if provisions benefiting developing countries included in the Paris Agreement are any indication.

Why target institutional investors?

The community of institutional investors is an obvious community to target when it comes to climate action even after just a cursory glance at the numbers. The UN may have only recently begun to strengthen ties with the private sector, but they are smart about it.

According to attendee New York State Comptroller Thomas DiNapoli, the state’s pension fund is the third largest in the country, with assets of an estimated $184.5 billion as of last year. California State Controller Betty Yee also attended the Summit. Her state has the largest pension fund in the U.S. with $300 billion in assets as well as being home to the world’s largest pension fund for educators.

If Figueres’ rhetoric at the Summit was any indication, the UN will keep up any pressure they can on investors to divest from fossil fuels and invest in renewables going forward and especially before 2020. Before the Paris agreement was signed, she said the timeline for investor transformation was likely around 15 years in part because she knew the political pressure of a shorter timeline may have jeopardized a deal. But with Paris a success, she now indicates the timeline is more like five years.

The audience may have been more shocked had it not been full of investors who were already committed to divestment and at least somewhat educated about the opportunities in renewables, but the ‘deadline’ fits given review periods countries agreed to comply with in the agreement.  If more investors see the future of climate change as the UN is depicting it, the Paris agreement really will have a monumental effect not just politically but economically.