FAQs
1) Who should read the London Accord?
The London Accord should be read by anyone with an interest in the “investability” of climate change solutions. The London Accord shares some of the world’s highest-quality investment research freely with everyone in the hope of improving the state of the debate, helping policy-makers understand investment thinking and helping investors assess their longer term risks and rewards.
Specifically these the London Accord submissions are a ‘must-read’ for:
- Institutional investors and advisors;
- Policy-makers interested in understanding the thinking behind investment appraisals of climate change initiatives;
- Solution providers interested in seeing how investors assess the economics behind their proposals.
2) Should I read all of it?
Well, we think so. Clearly, the Executive Summary and the Review of Contents are written with an eye to people short of time. However, what is interesting about the London Accord is that it is a good snapshot across a wide range of investment research thinking at the close of 2007. The papers are organised by theme (context, investment research, analysis and background) and you may want to look at all papers in a particular section. The context pieces are useful for everyone, too.
3) Isn’t there already a lot of information about investing in climate change?
These is a lot of diverse information about climate change but this exercise has a very specific focus, that of educating the reader to the potential financial costs associated with climate change solutions and the investment opportunities available in this space. No other report has pulled together the background, context and solutions.
4) Who are you?
We are an informal group of investment researchers, think-tanks and investors who came together from early 2006.
‘Informal’ means among other things that no money changed hands. The contributors donate their work to the London Accord. View a full list of participants on the website. Biographies of contributors are also available on this CD.
A brief history of how we got here is contained in report F1: The Road to London.
The project was directed by Jan-Peter Onstwedder on a one-year secondment from BP plc. The core steering group was:
Alice Chapple - Forum for the Future
Alex Evans - Center on International Cooperation
Michael Mainelli - Z/Yen and Gresham College
Simon Mills - City of London
Chris Mottershead, BP
5) Why did you write this?
In truth, the London Accord was born partly out of frustration. A large number of critics claimed that financial services (“the City” in the UK) didn’t “get” climate change. We contend that many of the people working in financial services globally do “get” climate change and care passionately about the environment, but wanted to lay out the economics clearly. And the economics are not for the faint-hearted.
Further, knowing the quality of investment research we were interested in seeing how this could be best shared with the global community. Ideally, sharing investment research thinking and methodologies should help policy-makers, solutions providers and NGOs understand how the financial services community assesses climate change. This should help lead to more effective policies that work with financial services thinking, particularly on things such as cap-and-trade, investment assessment and portfolio allocations.
For more background please read report F1: The Road to London.
6) Why this team of writers?
For investment research, who better than some of the world’s leading investment research teams? We have supplemented their submissions with some cross-analysis from outstanding think-tanks, investors, philanthropists and a leading legal firm. We wanted, and got, a “market perspective” on risks, reward and issues around climate change.
Our ideal would have been to have a paper addressing each of the 15 “Princeton” or “Pacala/Socolow” wedges. We cover most of them, though notable gaps are nuclear, substituting gas for coal, and waste and agriculture. The reasons for not having papers on those topics vary but mostly are that we didn’t find a research team who were in a position to contribute a paper.
In 2008, we may have additional papers covering these three gaps.
7) Isn’t this a ‘Copenhagen Consensus’ approach?
The London Accord methodology was inspired by the Copenhagen Consensus. However, there are at least two key differences, (1) we focus on climate change alone, and (2) investment researchers conduct the analysis, rather than academics. Further, the emphasis is on the investment opportunities that climate change affords, rather than societal cost/benefit analysis.
While many environmentalists, including the London Accord team, were disappointed that the Copenhagen Consensus approach did not find climate change mitigation benefit/cost ratios as high as other global issues, e.g. communicable diseases, the London Accord team does recognise that the Copenhagen Consensus approach has been ground-breaking.
8) What are your key assumptions and sources?
The London Accord appreciates, and has attempted to build upon, significant pieces of existing work. References are contained in many of the London Accord submissions, but we would highlight our appreciation of the work of the following organisations in particular:
The London Accord participants believe that the private-sector is not just important to solving climate change, it is essential. Private-sector investments have been responsible for all infrastructure development of significance over the past two centuries. Climate change will be no different. According to the UNFCCC, “When considering the means to enhance financial and investment flows to address climate change in the future, it is important to focus on the role of private-sector investments as they constitute the largest share of investment and financial flows (86%).” [UNFCCC, 2007]
Some shared assumptions among London Accord participants are:
- investors only invest significantly when they can make returns commensurate with risk;
- climate change is one of the world’s great externalities ( http://en.wikipedia.org/wiki/Externality);
- climate change, or more specifically green house gas emissions, can be internalised through a price mechanism, a cap-and-trade system, a carbon
- tax or, perhaps realistically, a hybrid cap-and-trade system with auctioned permits;
- if the cap on emissions is strict and enforceable, then the world is looking at one of the greatest changes to infrastructure and one of the greatest changes to the investment environment;
- there will be significant winners and losers;
- long-term investors, e.g. pension funds, need to take a portfolio approach;
- policy-makers need to avoid trying to guess the winners, but rather develop technology and solution neutral market prices within which investors and market participants can select winners.
9) What would you have done if you had more time or better foresight?
Ideally, we would have had more comparable, quantitative metrics across the eight investment opportunities. This would have permitted, with more time, a more in-depth portfolio analysis. Our portfolio analysis - D5: A Portfolio Approach to Climate Change Investment and Policy” - already highlights the fact that there is no “silver bullet” and that certain opportunities must be better defined, e.g. forestry and avoided deforestation. We hope that future London Accord work can develop the portfolio analysis.
There are a few areas which we had hoped to cover, but were unable to interest an investment research firm in a submission in time. These include:
- nuclear, where the firm approached has been unable to deliver for this first cut in November 2007;
- agriculture and waste.
We held one significant London Accord team event in March 2007. Ideally, we would have had time for one or two more where there would have been more opportunities for people to exchange ideas that cut across the various investment opportunities. We intend to hold a few events in 2008 where we hope the many dialogues that have been initiated may continue.
10) What do you want to happen?
Investors
We hope investors realise that the London Accord shows the time is nigh to change investment strategy markedly due to climate change. There are existing and near-term opportunities of significance. We anticipate great changes in investment methodologies and weightings over the next few years, particularly if policy-makers succeed in enforcing a price for carbon.
Policy-makers
We hope that policy-makers realise the importance of “technology neutral” incentive schemes, particularly cap-and-trade systems. We believe that a strong focus on developing a significant price for carbon in the near term by restricting emissions within a market mechanism, e.g. $30/tonne to $40/tonne of CO2 equivalent, will result in significant investment flows into mitigating climate change, regardless of many other policy instruments that could be deployed.
Solution providers
We hope that entrepreneurs and companies hoping to provide low carbon solutions are aided by the London Accord’s detailed grip on the big picture.
NGOs and Activists
We hope that the London Accord’s ‘open source’ approach to investment research shows them how financial services institutions think. If this helps them understand how financial services institutions evaluate climate change as a way to make money, great. If this helps them understand how better to influence financial services institutions towards sustainability, great.
11) What about peak oil and energy security?
It may be true that the world is running out of oil, or that the oil we do have and where it is located exacerbate global tensions. We have not dwelt at length on these issues, though do see - B2: “Forces Of Change In The Energy Market”. We believe that peak oil and energy security issues are likely to promote renewable sources of energy further. Two elements are core to the London Accord’s model (see the Review of Contents), the supply and demand curve for carbon and the supply and demand curve for energy. An increased cost of oil and energy, for whatever reason, is likely to make climate change solutions more economic.
12) What’s the answer???
There is no one answer. There are numerous partial solutions that can avoid climate change. A portfolio investment approach is essential.
We anticipate climate change investment in a diverse, distributed set of opportunities, operating within an effective carbon price. Ideally, that carbon price is international or even global.
13) What do you want me to do?
Whether you are a private investor, a corporate investor, a policy maker, a low-carbon solutions creator, or an advisor … The London Accord provides this research to allow you to make up your own mind, to make better decisions, and, in whatever way you are best able, to act, so that together we can use markets and investments to avoid climate change.
14) How does London Accord relate to the Stern Review and the UNFCCC's reports? Aren't you duplicating or getting in the way?
The Stern Review looked from a macro-economic perspective at the question how much it would cost to 'do something' about climate change now, or in the future. The conclusion is that strong and early action is much cheaper than waiting. (For more about the arguments, read The Road to London.) The UNFCCC report of August 2007 worked out how much investment, by region and by technology, is required to change from 'business as usual' to a 'mitigation' scenario that brings emissions down below 2004 levels by 2030.
That same UNFCCC report says that 86% of that investment has to come from the private sector. However, it does not say how that private sector investment will happen. (They tried, but their private sector consultations met with disappointingly little enthusiasm from the private sector.) So both Stern and UNFCCC work top-down.
The London Accord works bottom up. In our report, analysts look at real opportunities that could and should attract real private sector investment now. Therefore, we're not duplicating anything, and supporting Stern and UNFCCC!
15) Aren't you all commercial firms doing this in your own interest?
Yes. The London Accord was created by people working with many different types of organisations, and people working independently. The organisations consisted of large public companies, large investment banks, large research organisations, small research organisations, not-for-profits, local government and independent workers. Further, many of the people involved have multiple roles, e.g. work in a commercial firm, volunteer for charity and hold local government office. Realistically, all of these people and organisations face commercial pressures. Most people on the planet do. One key assumption behind the London Accord is that increasing commercial pressure to solving climate change via a carbon price will change behaviour. All commercial firms consist of people organised towards an economic goal here on the earth. So, yes, the collective commercial interests are aligned with helping to save the planet. |
