Towards a less carbon intensive economy

 

Unless six months of the COP21, Philippe Desfossés comes back on the commitments made ​​at the Climate Week in Paris.

What are your thoughts on the events of the past week ?

This week marks a real turning point. We kicked it off with a high-level meeting organised by the OECD. Followed by the Business & Climate Summit with the most ambitious companies going beyond announcing what they can already do and instead setting out what they plan on doing to speed up the transition to a low-carbon economy. Finally, Paris Europlace organised an event on Friday which helped remind the financial world that nothing would be possible without the action of banks, asset managers and, above all, investors.

What made this possible ?

What I am going to say runs the risk of fuelling the reputation of French pretentiousness. But who can deny the driving force of the French government. The French President was on hand to share his desire to do whatever it takes to ensure the success of COP21 in December. He revealed that he is working closely with Chancellor Angela Merkel on the matter as well as on numerous other issues. Laurent Fabius, Minister of Foreign Affairs, and Ségolène Royal, Minister of Ecology, both stated that in addition to current negotiations, economic players should seize the opportunities related to the energy transition and green growth.
Associations and organisations representing various stakeholders also participated. Lastly, we must also commend the involvement and support of the Ministry of Ecology and the Treasury Agency.
 

After this week, do you think there is hope that an agreement can be reached in December ?

As I mentioned, there has clearly been an increase in the level of awareness and strong political will. That being said, we must also be realistic. Admittedly, the participants in these types of meetings are already convinced. Numerous players, both companies and investors, still need to be mobilised. Furthermore, as stated by the Minister of Foreign Affairs, sufficient public funding needs to be mobilised in order to fulfil the commitment made in New York during the climate summit in September 2014 with regards to emerging countries. This funding is vital in order for these countries to join. They rightly point out that the majority of carbon released into the atmosphere by human activity is due to growth in developed countries. In any case, countries have until December to declare their intention to lower CO2 emissions. Laurent Fabius monitors the list daily. To date, 37 countries have published their contribution to COP21, the latest being Canada which more or less aligned itself with the United States with a 30% reduction objective by 2030 compared with the 2005 level. The UN's Green Climate Fund currently numbers 33 countries including eight developing countries. Lastly, Japan's contribution on 21 May 2015 brings commitments to USD 5.47 billion or 58.5% of the announced amount. Now over the 50% threshold, the fund can start allocating its resources for projects and programmes in developing countries.

What happens if no agreement is reached ?

This would clearly send a bad signal. However, a global agreement in itself is not going to fix all problems. Failing such an agreement, economic players will continue their efforts to define solutions at a local level. California and Quebec have created ties between their carbon markets. Several major towns and regions in China have set up their own. In France, we can look to the Nord Pas de Calais region has which has just launched a large-scale renovation programme of 100,000 housing units as part of the Third Industrial Revolution strategic project. In any case, as President Hollande said, both for businesses and investors, there is an urgent need for carbon pricing. In addition to paying for the external negative factors associated with CO2, carbon pricing will also encourage new investments in the green economy. A number of businesses already use carbon pricing in their decision-making process.
 

How do you see the position of investors ?

As with the other players, not everyone is equally aware of the urgency of climate change. However, I believe that we will see growing interest. Firstly, it has become very difficult to act as though carbon is not a risk. The Risky Business report published last year by T. Steyer, M. Bloomberg and H. Paulson affirms that global warming constitutes a risk for economic activity and that all major regions of the United States will somehow suffer a negative impact. From a trustee perspective, although we have to invest in a conservative and profitable manner in assets that guarantee our commitments to pay pensions, how can we as a pension fund continue to ignore this risk ? Numerous pension funds may currently be unaware that their balance sheets contain stranded assets whose values are already under extreme threat. I believe that all investors should assess the carbon risk carried in their balance sheets. Those who do not are exposed to a legal risk as we have recently seen with the announcement in the media of the next legal actions under the AODP (Asset Owners Disclosure Project).
 

In this context how should Michel Sapin's announcement be interpreted on investors declaring their carbon footprint ?

For the past two years, ERAFP has measured the carbon footprint of its equity portfolio. If carbon is considered a risk, as I previously mentioned, then we should measure it. We all know that we cannot manage what we cannot measure. The Minister's announcement stating the political determination to require mandatory carbon footprint disclosure for investors is therefore excellent news since this will help expand the system and immediately result in demand for expertise to improve the various methods used to measure carbon risk. Index providers will also have to offer new instruments to measure performance and carry over the low-carbon investment policy. Whereas asset managers will be encouraged to offer "low carbon" solutions. In this respect, we are pleased to report that French asset management companies are well represented especially with Amundi and Mirova.
 

Based on your experience with ERAFP, can you tell us why this is so important ?

Unlike small funds that manage several hundreds of millions of euros, a large-scale investor like ERAFP cannot theoretically exclude sectors. All major institutional investors therefore invest across all sectors of the economy but look inside each of these sectors to determine those businesses that are beyond repair and that therefore must be removed from their investment scope. This Best-in-Class policy therefore has the advantage of being realistic because we cannot seriously believe that with the wave of a magic wand we can stop using fossil fuels overnight. Furthermore, does the entire economy or just a portion of it need to be decarbonised ?
By consistently measuring over time the carbon intensity of the businesses in which we invest and taking into account their ability to lower the carbon footprint of our portfolio, we can reallocate capital to the most energy-efficient companies in each sector.
 

Should we assume from your answer to the previous question that you are not interested in thematic investment or green bonds ?

Not at all. Green bonds have the advantage of displaying in a very visible manner the possibility of financing an action intended to support the transition. They also contribute to raising the level of awareness. Now, is it more important that the bond is green or that the issuer is green ? Given that in a balance sheet assets are used to finance liabilities, for ERAFP, the answer is clear. This is why we prefer issues that are intended to finance a ring-fenced project in an autonomous legal structure.
As a thematic investment, it is important to participate in financing innovation. We cannot hope to overcome the constraints with which we are faced solely by optimising current techniques. We all know the limits of processes like Six Sigma. We need to think out of the box and contribute to the rise of disruptive technologies.
We currently remain dedicated to a general approach that seeks out the most efficient allocation of capital. If we consider housing, for example, what is more efficient ? With a certain amount of available financing is it better to finance a building that meets the highest HQE standards or renovate several hundred housing units ? As is often the case, the most efficient is not always the most visible.
 

AXA announced that the group is divesting from coal. What is your reaction to this news ?

Coming from a group the size of AXA this announcement clearly generated interest. In this respect, from the start we have not practised sectoral exclusion due to our best-in-class approach which results in eliminating coal companies because their normalised emissions measured against their revenue are very high. We can also add that the price of scrubbers is so high that it has already led to the accelerated withdrawal from coal-fired thermal power plants in the United States. The change in the share price of coal companies is consistent with the outlook of their activity.
 

The CDC announced that it would be joining IIGCC. Are you pleased ?

As the chair of IIGCC's board, I can confirm that I am not just pleased but extremely pleased. CDC is one of the largest French players to join the Institutional Investors Group on Climate Change.
IIGCC which already includes over 100 members (primarily pension funds) is collectively responsible for more than €10,000 billion. We are the real business owners. Nothing could be done without us.
We are involved at the level of the European Commission in Brussels as well as with our respective governments. One of the key elements of our message is very simple, we want a price set for carbon through a market that ensures its relative stability. This is why we insisted on the urgency of implementing the MSR (market stability reserve).
More members in IIGCC means more weight in debates and will help make companies understand that we, the owners, understand that we can pursue a constructive dialogue both in terms of carbon and other matters.