Footprint Network Blog - Footprint for Finance
The landmark U.S.-China climate change agreement announced this week is a game changer for our energy future because it represents strong recognition of the need to wind down fossil fuel use. it recognizes the need to wind down fossil fuel use to zero within a few decades. What had been a physical necessity but a political taboo is now being acknowledged by the two countries with the largest CO2 emissions.
Other countries have been waiting on the sidelines for the United States and China to act on climate change. So President Barack Obama and President Xi Jinping’s commitment to reduce greenhouse gas emissions and boost renewable energy adoption by 2025 and 2030 respectively—just 10 and 15 years away—sends a promising signal to the world community on the path to the Paris climate summit at the end of next year.
The new goals would keep the United States on the trajectory to achieve deep economy-wide carbon emission reductions on the order of 80 percent by 2050, according to the White House. China, meanwhile, has targeted total energy consumption coming from zero-emission sources to around 20 percent by 2030. Both actions will happen well within the lifetimes of many people today.
These targets represent a significant shift in political momentum and suggest that moving out of fossil fuels may finally have won mainstream acceptance.
Of course, it will take significant investment for nations to transform their economies, and those costs are only likely to increase the longer nations delay in taking action. Consequently, it’s in the self-interest of every nation to act now to shift toward low-carbon policies as a way to “future proof” its economy.
Our analysis shows that countries are unequally exposed in terms of the scale and impact of reforms required to move to low-carbon economies. The longer countries wait, the more their carbon intensive assets will lose value in a low-carbon future. This inaction may lead both to a loss of competitiveness and potentially even a higher credit default risk. We are working with the U.N. Environment Programme Finance Initiative (UNEP FI) and leading finance institutions to develop tools for the finance industry to better measure these economic risks when evaluating sovereign bonds.
To succeed, government leaders at all levels need better tools to make economically effective long-term decisions on everything from infrastructure to energy provision to buildings. Consequently, we have worked with state leaders in the U.S. to enhance traditional net present value (NPV) tools that recognize the economic and resource context in which the investments will operate. Such assessments provide more realistic estimates of the future costs and benefits associated with particular investments and show that in many cases, the low-carbon options are already today the economically superior choice.
Indeed, the U.S.-China agreement announced Wednesday suggests we need an entirely new way to determine the value of fossil fuels and assets that could become stranded because of their overdependence on those fuels.
The details of how U.S. and China will achieve their ambitious goals remain to be seen, and the agreement may prove to be largely symbolic. But symbols can be powerful, and we believe the agreement portends a brighter outlook for action on climate change in 2015.
Susan Burns, co-founder and CEO of Global Footprint Network, will be honored today at the International Society of Sustainability Professionals (ISSP) Conference in Denver, Colo., as both she and co-founder Mathis Wackernagel are inducted into the ISSP Sustainability Hall of Fame. She has taken this opportunity to share insights from her journey.
How did you "fall" into a career as a sustainability professional?
As a child I loved nature, and I somehow knew there was a problem with pollution and the extinction of species, even though during my suburban upbringing it wasn’t exactly kitchen table conversation.
After earning a degree in environmental engineering, I started working in the consulting industry. I like to joke with my younger colleagues that I was working in this field before “sustainability” was even a word! I started the pollution prevention practice at ERM West. Then I met Ernest Lowe and Gil Friend, some of the early thinkers around the idea of industrial ecology and how the waste of one industrial process can be used as the input for another industrial process. The idea is to mimic nature where production and “waste” are all incorporated into one closed loop, and everything is utilized. I ended up starting a small consulting firm, Natural Strategies, with Adam Davis and the late Charles McGlashan, two brilliant men. Our vision was to help global corporations adopt sustainability as a source of competitive advantage even though the business world was very skeptical at the time.
Did you know the Chinese province of Guizhou in southwest China bears some striking resemblance to Switzerland? I confess I didn't, until I was invited to Guizhou last month to speak at Eco-Forum Global. Since 2009, this annual conference gathers participants from around the world to share knowledge about policies regarding green economic transformation and ecological security. This year I spoke on a finance panel led by the chief economist of Bank of China, Ma Jun, and a panel organized by the Sino-Swiss Dialogue.
Just like Switzerland, Guizhou is landlocked and boasts a mountainous landscape. It is one of two provinces in China that President Xi Jinping declared to be testing grounds for China’s new focus on "eco-civilization" and the "China dream."
Credit to CGP Grey, CC BY 2.0
“Climate Change Is A Global Mega-Trend For Sovereign Risk.” That's not me talking. It’s the title of the latest report published by credit rating agency Standard & Poor's. While climate risk is not yet officially included in the agency’s credit rating model, it's the first time that a major rating agency has specifically recognized an environmental issue in its forecast of countries' economic health and their ability to honor their sovereign debt.
This report is a huge development as far as the financial sector is concerned. It is a clear signal that the message about the critical need for countries to incorporate environmental risk into their development strategies, economic plans and public policies is finally beginning to hit home. As such, it is great news.
S&P’s climate risk report is just the starting point of a much bigger conversation. The sovereign bond market has been a long overlooked portion of the financial system, even though it represents 41 trillion USD of total capital flows. Because a government's cost of borrowing is strongly related to its credit rating by agencies such as S&P, governments are powerfully motivated to manage issues that could harm their credit rating. Recent analysis has shown that environmental risks do impact national economic health, and by extension default risk, but are not currently incorporated into most country risk models. Incorporating environmental risks across the finance industry would undoubtedly cause nations to pay attention to ecological risk like never before, especially due to the potential for some governments to be downgraded (and others upgraded), thereby affecting their borrowing costs.
The S&P report looks at the economic impacts of climate change, such as changing rainfall patterns that could affect agricultural yields. But climate change isn’t the whole story. Our research has shown that resource constraints (limited supply of fossil fuels, metals and minerals, food and fiber) coupled with rising global demand also have a profound effect on the balance sheets of nations.
Taken together, the conclusion is clear: For countries to protect themselves from the erosion of economic performance due to climate change and growing resource scarcity they will need to redesign their economies in order to be ‘fit for the future.’ They will need to minimize their liabilities and optimize their opportunities. They will need to be resilient in the face of climate change but will also be compelled to view their natural resources as a source of wealth for their nations, rather than assets to liquidate on their way to economic growth.
Approximately 80 percent of the world’s population lives in countries that are in ecological deficit. In other words, their populations demand more resources and ecological services than can be supplied on a net basis by their own ecosystems. Deficit risks play out in three ways. Here goes, briefly:
1. Trade-related risks: countries that compensate for ecological deficits through imports are exposed to trade related risks such as commodity-price volatility and possible supply disruption.
2. Degradation of natural capital: soil, fisheries and forests that are overused or mismanaged can suffer from reduced yield, affecting production and possibly increasing countries’ reliance on imports.
3. Stranded assets risks: Many nations have invested in carbon-intensive infrastructure and industrial processes. Countries are unequally exposed in terms of the scale and impact of needed reforms as governments around the world respond to climate change.
Now, the good news is that governments do have options. The management of resources and fossil fuel dependence, to name but two aspects, belong in the realm of political choice.
We believe we're providing a very important lens for credit risk perspective. And so we're about to launch the second round of E-RISC (Environmental Risk Integration in Sovereign Risk Credit) research with seven partners from the financial industry: S&P, HSBC, European Investment Bank, Caisse des Dépôts in France, Colonial First State in Australia, KFW in Germany and Kempen in the Netherlands. Some 18 months after we launched the initiative, our focus is now on testing and refining the methodology to make it robust and useable in investment decisions.
Why is this important? Because getting the finance industry to incorporate environmental risks is one of the best ways to help governments pay attention. Ultimately, our goal is to see the implementation of policies at the national and regional level that address those risks.
The challenge is on.
Footprint for Finance
Some of the economic implications of resource constraints were introduced to the world of international finance this week in London, when Global Footprint Network and the UN Environment Programme Finance Initiative (UNEP FI), in collaboration with leading financial institutions, launched the E-RISC (Environmental Risk Integration in Sovereign Credit) report at Bloomberg, a leader in global financial data.
The interactive event drew over 150 participants, including representatives from leading financial institutions, investors, asset management firms and rating agencies, including Caisse des Depots, SNS Asset Management, Standard & Poor’s, J.P. Morgan, KfW Bankengruppe, Deutsche Bank, HSBC and Barclays.
To date, tightening resource constraints and their impacts on national economies have been largely absent from financial analyses. The E-RISC report fills this gap by exploring to what extent resource and ecological risks can impact a nation’s economy and how these factors affect a nation’s ability to pay its debts.
Global Footprint Network supports the Natural Capital Declaration, a commitment made by CEOs from the finance sector to integrate natural capital accounting into their financial products and services.
Global Footprint Network is committed to creating a world where everyone can live well within the means of one planet. It is going to take all of us pulling together toward this common goal. We recognize the need to push the frontiers beyond business-as-usual and to explore more integrated approaches to finance. As financial institutions are an integral part of the economy and society, initiatives like the Natural Capital Declaration are important to help lead the way.
As people move on from the suspense, excitement, and sometimes disappointment that was Rio+20, at least one thing is clear to us—the Ecological Footprint is more important than ever in a world where international cooperation on sustainable development has not delivered everything the world hoped it would.
Global Footprint Network Science Coordinator Kyle Gracey (far right) at the Eye on Earth Panel
Energy expert Robert Rapier, the Chief Technology Officer at Merica International, writes and speaks about issues involving energy and the environment. Merica , a privately held energy company, is involved in a wide variety of projects, with a core focus on the localized use of biomass to energy for the benefit of local populations.
In this second of a two-part series on Competitiveness 2.0, one of Global Footprint Network’s strategic programs, the Consumer Energy Report columnist and author of “Power Plays: Energy Options in the Age of Peak Oil” explains below how energy constraints are becoming so central to a nation’s competitiveness.