A global network of institutional investor organizations responsible for roughly $22.5 trillion in assets has released a letter calling for a new dialogue between investors and “the governments of the world’s largest economies on climate policy and the development of workable frameworks that will reduce climate risk and support low carbon investment.”

Organizations including the Institutional Investors Group on Climate Change (Europe), Investor Network on Climate Risk (North America), Investor Group on Climate Change (Australia & New Zealand), Asia Investor Group on Climate Change, and the United Nations Environment Programme Finance Initiative all signed on to the letter (press release here).

In total, these global institutional investors are responsible for roughly $22.5 trillion dollars in assets.  To put it another way, that would equal the combined Gross Domestic Product (GDP) of the European Union and China for 2011, according to the International Monetary Fund.

These organizations recognize the need to divert from our current path and begin to radically decarbonize energy systems.  To accomplish this, they say investors and governments must work together to identify clear policies to further this goal. The letter calls for an overhaul of policies and economies that encourage high-carbon investments. It lays out seven areas for discussion:

1. Clearly identify which policies encourage low carbon investment and discourage high carbon investment;

2. Reinforce the importance of reliability and predictability in climate and clean energy policy including the fundamental importance of avoiding retroactive policy steps, which undermine the confidence of investors for future investments;

3. Outline further steps that governments can take to improve climate policies, including learning from other governments about policies that encourage investment in greenhouse gas emissions mitigation;

4. Where carbon markets are in place or are under development, seek ways to increase their effectiveness and seek linkages between schemes to support the development of broader, more liquid markets;

5. Continue to work towards stronger international agreements, with necessary levels of ambition for emissions reductions and including rules based frameworks in order to provide appropriate investment signals to capital markets;

6. Engage financial ministries and financial sector representatives in dialogue on the development of workable solutions that will enable deployment of private capital in climate solutions and consider the impact of unintended consequences of wider financial and other regulations on investment in low- carbon, climate resilient assets;

7. Take steps to phase out subsidies for fossil fuels, which remain six times higher than subsidies for renewable energy sources, while facilitating the economic transition for affected communities.

Why do investment firms care about climate change? Simply put, gobal warming and its potentially disastrous impacts are throwing a monkey wrench into their investment plans.  Previously solid investments are now being considered risky because of impending climate change impacts.  Entire development efforts are being undermined by climate change.  The letter puts it this way:  “A new dialogue, if successful, will support low-carbon investment decisions, reduce climate risk and protect the financial interests of the ultimate beneficiaries of institutional investment organizations.”

Although some individual countries have made significant headway, more is needed in the form of long-term international agreements with clear goals to prompt investment.  The letter cites examples of well-designed policy mechanisms that have encouraged investments in clean energy and suggests that “investment-grade climate change and clean energy policy” should:

Include clear short term (2015), medium term (2020–2025) and long-term (2030–2050) greenhouse gas emission reduction objectives and targets, and comprehensive, enforceable legal mechanisms and timelines for delivering on these objectives and targets. Examples include the UK’s Climate Change Act, South Korea’s Green New Deal, California’s Global Warming Solutions Act and federal vehicle efficiency standards in the United States;

Provide incentives to shift the risk reward balance in favour of low carbon investment. Examples include the feed-in tariffs that have been adopted by many European countries and also form an integral part of policy in China and Japan, loan guarantees such as those provided in the United States, to incentivise investment in renewable energy, and tax incentives;

Encourage large-scale investments in low-carbon solutions, recognising that scale is critical to making low-carbon investment opportunities more cost-effective than high-carbon opportunities. The benefits of focusing on scale are being seen in areas such as solar (where photovoltaic module prices fell by close to 50% in 2011), and onshore wind (where turbine prices fell by between 5% and 10% in the same period);

Be of appropriate duration, evolve in a predictable way and ensure the timeframe over which incentives will be reduced is transparent. Public policy needs to align with investment life-cycles, often a decade or more. Germany’s renewable energy targets underpinned by a feed-in tariff support regime where the level of support reduces over time and the renewable energy target arrangements to 2030 in Australia are examples of predictable, transparent policy;

Harness the power of markets to find the least costly ways to reduce emissions. Carbon markets (emission trading schemes) have a critical role to play in delivering greenhouse gas emission reductions in an efficient manner, but must be designed to successfully co-exist with other low carbon incentive mechanisms like feed-in tariffs. The European Union’s Emission Trading Scheme has been the flagship programme in this regard and other countries and states – South Korea, California, North-eastern United States, Australia, New Zealand and China – have established their own schemes, many designed to avoid challenges encountered by the EU ETS;

Align with wider policy goals including economic, energy, resources and transport policy objectives. This alignment, as seen for example in China’s 12th Five Year Plan and South Korea’s New Green Deal, increases investors’ confidence in the credibility of governments’ commitments to action on climate change.

“There is growing evidence that, under the right policy conditions, institutional investors will significantly increase their low-carbon investment allocations,” the letter says.

The Doha Climate Change Conference that starts on November 26 is an opportunity for the world to discuss and draft international agreements to lower carbon emissions and drive low-carbon investment.  Parties to the UN Framework Convention on Climate Change will negotiate on a second commitment period under the Kyoto Protocol and additional commitments following the Durban Platform for Enhanced Action agreed at the last climate summit in 2011.

A new study issued by the World Bank, titled “Turn Down the Heat,” finds that climate change will fundamentally alter our world.  The report analyzes the likely impacts and risks associated with 4° Celsius warming within this century.  The conclusions are similar to a PwC study released last week.  Jim Yong Kim, President of the World Bank says, “the latest predictions on climate change should shock us into action.”

See also:

Climate Progress: Nearly 200 Leading Global Companies And Investors Call For ‘Clear, Stable, Ambitous’ Carbon Price

LiveScience: Climate Scientists Applaud Dire World Bank Report

Earlier posts:

Cold Cash, Cool Climate

Have multinationals hijacked Rio+20?