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G7 - a direct hit on public policy engagement

Coming across the headline G7 Leaders agree to phase out fossil fuels in the Financial Times of 8 June, I felt a small glow of satisfaction.

What, you may ask, is the importance of this statement? Isn’t it a statement of the bleeding obvious, given the G7’s long-term commitment to limit climate change to 2°C? For those of us involved in the process, the statement represented the inclusion of a piece that until then had been missing from international climate talks – the so-called long-term goal. It is something investors specifically asked the G7 to consider during talks at the Business and Climate Summit in Paris at the end of May.

Investor ideas   
Back in March of this year, I was part of a small group of concerned investors that met to plan how best to execute the investor communities’ near universal call for action on climate change. We reviewed the state of international negotiations, which was built on four pillars:

1) national pledges to reduce emissions
2) non-state contributions by regions, cities and businesses
3) climate finance, including the promise of up to $100 billion of funding for climate projects in developing countries by 2020, and
4) the legal agreement itself, a ratchet mechanism allowing for increasing efforts over time, and the monitoring of progress.

International negotiations seem to face two challenges. The first is about the overall level of ambition. Most of the largest emitting countries are likely to make pledges, referred to as Intended Nationally Determined Contributions (INDCs) in UN-speak, but these are not expected to deliver the desired 2°C target. The second challenge is that most INDCs will only cover the period from 2020 to 2025, leaving little forward guidance over longer investment horizons. As investors, we felt that a simple line in the sand stating the date for total decarbonisation of the economy would enable the industry to take a long-term view on the emissions trajectory. As a range of other stakeholders were calling for the same goal, it seemed achievable too. We therefore decided to write to the G7 finance ministers to explain the importance of including a long-term goal in the international climate negotiations and started work on the first draft of the letter. Many iterations later, with invaluable support from the Institutional Investors Group on Climate Change, the letter signed by 120 heads of asset owners and managers representing $12 trillion of assets was delivered to the G7 finance ministers calling for support for “a long-term global emissions reduction goal in the Paris agreement”.

Shift in G7 agenda
Can we claim credit for shifting the G7 agenda? This will always be difficult to know for sure, although I understand it was well received and played its part to ensure the issue made it onto the agenda. And we got more than we bargained for. Over three pages of the 17-page official G7 Leaders’ Declarationstatement were dedicated to climate change and resource efficiency. In addition to the commitment to a long-term goal to decarbonise the global economy by the end of the century, the leaders called for emissions reductions by 2050 at the upper end of the latest recommendation by the Intergovernmental Panel on Climate Change of between 40% and 70% compared to 2010 emission levels. They also reiterated their strong commitment to jointly mobilising $100 billion of climate finance a year by 2020 and the promise to eliminate inefficient fossil fuel subsidies.

Walking the talk 
We now need to see the G7 calls converted into a global pledge at the Paris talks this winter, which in itself is a nontrivial challenge. In the meantime, we – as investors – must continue to concentrate our efforts on ensuring that we can help mobilise the additional capital required in the green economy. This includes continuing engagement with the companies we own to ensure they fully anticipate the opportunities and risks of this long-term structural shift in the world economy.

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