The below proposal was written for the 2016 Global Affairs International Policy Ideas Challenge. The report was written with Aliya Dossa and Chiyi Tam.
We were selected as one of the top ten entries and we are going to give a presentation to representatives from the Ministry of Global Affairs on May 9th. If we make it into the top three we will receive $5,000 research award and an opportunity to present the completed idea to a larger audience of Global Affairs personnel later in the summer.
Climate Finance: Mobilizing Institutional Investors
Global climate change is the most pressing challenge of our time. The suite of actors necessary to overcome this challenge includes all levels of government globally, as well as non-state actors such as corporations and individuals. These actors will be required to invest, on average, 1% of global GDP per year to reduce GHG emissions to sustainable levels, and according to some as much as 5.5% of global GDP per year.(1) This is money that goes beyond what many states are able to spend; other sources will need to be found. This project proposes to study how the Ministry of Global Affairs can mobilize institutional investors, as non-state actors, to help invest in (and, indeed, profit from) policy solutions that benefit the climate. The successfully realized project will create a convening process, as well as an outline of typologies of projects that are both of interest to the investors, and achieve significant GHG reductions.
Institutional investors, globally, accounted for over $80 trillion in holdings in 2011.(2) Collectively they represent the largest pot of investment money on earth. Institutional investors include public and private pension funds, insurance companies, foundations, endowments, various trusts, certain banks, and other entities. Beyond their immense wealth, institutional investors prefer long-term investments with a low risk-profile and continual returns.
When we think about the investments needed to protect the climate, there is a clear convergence here. Particularly in terms of power-generation and mobility, there are necessary investments that will be multi-generational in use and will provide a steady rate of return.(3) For example: the Ontario Teacher’s Pension Plan, in partnership with other entities, already owns a renewable energy investment firm.(4) There is clearly an immense role for institutional investors — and the Ministry of Global Affairs — to play in advancing these kinds of transformative partnerships and investments.
There is still significant uncertainty as to how policy-makers and institutional investors will collaborate on climate change policy. Though initiated in 2008, the Institutional Investors Group on Climate Change (IGCC) was still calling on governments in 2014 to work more closely with them and to develop clear mechanisms for supporting their mobilization of capital. While countries have already put forward significant global contributions, including Canada’s own contribution of $2.65 billion (CAD) to the United Nation’s Framework on Climate Change (UNFCC)’s “Green Climate Fund,” more money will be necessary to realise the Paris Agreement’s ambitious goal of preventing warming from exceeding 2 degrees celsius.(5) Private investors are beginning to make major commitments, but this still falls short of trillions needed. Canada has the opportunity to use its clout and global brand in climate policy to convene institutional investors, especially national pension funds, to discuss how best to efficiently mobilize and target institutional capital for climate-friendly investments.
This research proposal therefore aims to address these five key questions
1. Are there any past models of nations convening institutional investors, either collectively or as one of the sub-types (e.g., pension funds), to direct their investments towards particular areas or subjects?
2. What kind of convening structure could Global Affairs utilize to bring together institutional investors (e.g., should it partner closely with the IGCC, another existing entity, or create something new)?
3. What key actors — e.g., the Canada Pension Plan, the Rockefeller Foundation — would need to be involved for such a forum to be successful?
4. What kinds of incentive structures could Global Affairs utilize to garner support and direct action on climate-friendly investments (e.g., a pledge system, mutually agreed upon targets, etc.)?
6. What typologies of investment are best suited and most desirable to institutional investors that are also GHG-reducing (e.g., solar farms, rapid transit lines, etc.)?
Our research methodology involves a literature review analyzing the questions above, paying particular attention to industry-identified gaps in policy. This will be followed by a cost-benefit analysis to determine the most economically and socially viable green infrastructure and energy-generation investment opportunities for institutions involved — both nationally and internationally. Finally, a portfolio of investment option typologies and an actionable path for their implementation will be developed.
Developing an effective convening mechanism for institutional investors and states to discuss climate finance is necessary if climate investments are to be made. If this research successfully informs the creation of such a mechanism, the resulting coordinated investment efforts would systematically maximize their social-impact potential, beginning a new era for innovative climate finance.
(1) Stern Review. (2006) Pg., 211; IPCC (2007) Pg., 11; 19
(2) Çelik, Serdar and Mats Isaksson. “Institutional Investors and Ownership Engagement,” OECD Journal: Financial Market Trends, Volume 2 (2013). Pg., 97 Accessed from http://www.oecd.org/corporate/Institutional-investors-ownership-engagement.pdf
(3) The IPCC analysed four scenarios in 2014 and estimated that “global cumulative RE investments [needed] (in the power generation sector only) ranging from USD2005 1,360 to 5,100 billion for the decade 2011 to 2020, and from USD2005 1,490 to 7,180 billion for the decade 2021 to 2030.
Edenhofer, Ottmar, Ramón Pichs-Madruga, Youba Sokona, Kristin Seyboth, Susanne Kadner, Timm Zwickel, Patrick Eickemeier et al., eds. Renewable energy sources and climate change mitigation: Special report of the intergovernmental panel on climate change. (Cambridge University Press, 2011.) Pg., 20
(4) Ontario Teacher’s Pension Plan. “Santander, Teachers’ and PSP Investments launch Cubico Sustainable Investments,” OTPP, May 28th, 2015. Accessed from: https://www.otpp.com/news/article/-/article/738166
(5) COP21. “List of Recent Climate Funding Announcements,” COP21. Accessed from: http://www.cop21.gouv.fr/en/list-of-recent-climate-funding-announcements/