In search of perfection: Effective implementation of the Paris deal

Steve Waygood, Aviva Investors

UN Secretary General Ban Ki-moon borrowed an aphorism attributed to Voltaire when he addressed the closing plenary of COP21: "We must not let the quest for perfection be the enemy of the public good." He was thanking negotiators for the compromises that they had made in the pursuit of the Paris Agreement on climate change. Ban Ki-moon’s statement could equally apply to any analysis of the agreement itself.

The deal marks an extraordinary moment in global history. Left unchecked, climate change would be the greatest market failure of all time, the greatest inequality of all time, and it would represent a social catastrophe. Instead, the unprecedented international accord now has the potential to be a game changer in the fight against climate change. 

As an insurance company, Aviva is very positive about the newly calibrated political ambition to pursue efforts to limit climate change to 1.5°Cabove pre-industrial levels. More than 4°Cwould mean insurers wouldn’t be able to cover the risk. The Agreement provides us with hope that many of the extreme weather related catastrophes that are associated with a changing climate will not come to pass.

The consequences of rising temperatures would be similarly catastrophic for global markets – Aviva sponsored research published earlier this year attributed the value at risk of unchecked climate change – roughly speaking the value of global assets – to be up to $13.8 trillion for investors and $43 trillion for governments if temperatures rise by 6°C. As an investor, Aviva supports the specific commitment to "Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development."

But this welcome new focus on climate finance is almost completely restricted to the tens of billions of financial flows of aid from developed to developing countries. Shouldn't climate finance as a concept also cover the roughly $300 trillion in the global capital markets? After all, this is the capital that finances companies conducting renewable energy innovation, and energy efficiency technologies. It also finances fossil fuel exploration and production. This is where the real influence exists. There is not much within the Paris Agreement that, by itself, will move money out of the latter and into the former. It is particularly disappointing that there is no mention of a carbon price, carbon tax, removing fossil fuel subsidies, or extending emissions trading – the stuff that really moves markets. This is left to member states to deliver at the national level.

However, as has been pointed out by the highly influential Carbon Tracker initiative, the level of ambition enshrined in the Paris Agreement does mean that member states now have to implement measures that lead us all to burn significantly less than a third of the known fossil fuel reserves. Once the market sees effective measures taken at the national level to deliver on this level of ambition, then we will see capital move at the scale we need. Judging by the significantly increased flow of relevant research from credit rating agencies and sell side brokers, analysts are watching government action here more closely than ever. Post Paris, market sentiment is poised to respond positively.

It would also be a gross error to judge the success of Paris on the text of the Agreement alone. COP21 provided a platform for thousands of new commitments from countries, companies, investors and civil society.

For example, we have well over 180 Intended National Determined Contributions (INDCs), or Climate Pledges, where member states have outlined their greenhouse gas emission reduction plans.

There was also very welcome news from the Financial Stability Taskforce, which unveiled an industry-led disclosure task force on climate related risks in order to develop voluntary and consistent climate relates disclosures “of the sort that would be useful to lenders, insurers, investors and other stakeholders in understanding material risks”.

The OECD also unveiled plans to consider whether a new guideline for investors in relation to their fiduciary duties and climate change was necessary, which Aviva would warmly welcome.

And, rather spectacularly, China announced plans to set up an effective emissions trading scheme that will cover their top ten thousand companies. With China stating that it will have a national emissions trading scheme by 2017, potentially carbon leakage will be a thing of the past. And with transparency and accountability there will be nowhere to hide. Analysis by the UK Government’s Department of Energy and Climate Change and the Carbon Trust estimated that in a 2°Cscenario the global price of carbon is expected to converge at $140 per tonne of CO2 by 2030 and $400 by 2050.

Without Paris, we wouldn't have these commitments. The world has acted in a strong and coordinated manner to address climate change, mapping out the way forward. The Agreement doesn't correct the market failure of climate change and it is clear that the deal now requires serious work on its implementation. But the Paris Agreement does represent a significant step forward and with the right implementation, it will be the game changer that we need.


Steve Waygood is Chief Responsible Investment Officer at Aviva Investors