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Renewables offer "best outcome for dollars invested": investors talk carbon risk in Paris

Date
19 May 2015
Renewables offer "best outcome for dollars invested": investors talk carbon risk in Paris

PARIS: Investors and business leaders got an in-depth look at different ways the industry is measuring carbon risk exposure at an event in Paris today, with renewables forming the most compelling economic case for future investment across the board.

During ‘Finance and Climate: Metrics’, which was hosted by Caisses des Depots and 2° Investing Initiative on the second day of Climate Week Paris, Nick Robins, Co-Director, UNEP Inquiry introduced a session on measuring carbon risk by first urging the expert speakers to focus on how their methodologies can be put into practice successfully: “We can all come up with exciting innovations, but how do the tools and practises presenters will put across today become systematic – part of the normal way of doing things?”

Stepping up to the challenge, financial market analyst Mark Fulton explained how his Carbon Asset Risks guidelines, which will be launched in June through World Resources Institute and UNEP Inquiry, use a ‘stress test’. The idea is for investors to “take assets and stress them against outcomes”, the real-world opportunities of which were also highlighted by Hugues Chenet, Scientific Director, 2° Investing Initiative.

STRANDED ASSETS

One area which is particularly central to carbon risk methodology is stranded assets – wasted capital of fossil fuels remaining unburned due to climate impact. Mark Fulton illustrated how crucial stranded assets are by suggesting they are thought of in terms of lost "future resources” rather than wasted reserves.

Mark Campanale, Founder and Executive Deputy Chairman, Carbon Tracker Initiative also put the onus on traditional energy sources to tackle carbon risk, stating: “We think what investors and companies are financing, when it comes to fossil fuels, is the best lead indicator of future climate risk and a particular future of emissions. “

The potential earning implications of stranded assets can be mapped out in Bloomberg’s carbon risk evaluation tool, which the company’s Senior ESG Analyst Gregory Elders, walked the audience through. Using customizable scenarios such as price of oil declines or oil extraction cost increases, he says a basic earnings model can be generated for investors, stating simply: “If it costs most to dig out of the ground then we’re probably not going to dig it out.” Interestingly he explained the model has seen a lot of interest from pension funds foremost and then asset managers second, as their clients started asking Bloomberg about the need to evaluate carbon risk.

RENEWABLES ROI

Mark Lewis, Senior Analyst for Energy and Climate, Kepler-Cheuvreux switched the conversation firmly away from fossil fuels and onto renewables. He explained that the main difference is that the power industry is traditionally very focused on the long term – or about 40 years, which is what an average power station would run for. Quoting IEA stats, he said: “[But] a lot can happen in 40 years. Look at what happened to the cost of solar generation in just the last five years. We’ve come from US$400 per MWh in only 2010 at global benchmark price, and today we’re at about US$130.” He said decisively: “The rules of the game have completely changed because the cost of renewables is coming down much more quickly than the incumbent industry can cope with.”

The Senior Analyst also reassured the audience that high upfront costs shouldn’t be a barrier to renewables adoption. As an example, he said building solar parks in the world's best locations today – nodding to Dubai’s record low solar price – brings better energy return on capital invested, despite higher costs early on. This matches today's onshore wind power market, which is “as good as if not better than it is for gas”.

He concluded that this is a “very important indication of where we’re heading. The costs of these alternative technologies is coming down so fast. My reckoning is, if you want to get the best outcome for dollars invested, selling price to consumers and climate impact – it has really got to be renewables.”

CARBON COMPLIANCE

But while the renewables choice makes undeniable economic sense, there are less glamorous factors for investors to consider such as carbon liability, which Michael Wilkins, Managing Director of the Infrastructure Finance Ratings group of Standard & Poor's Ratings Services says goes “well beyond carbon regulation.”

He explained that all CO2 producing entities will fall under a compliance regime of some kind – whether an emissions trading schemes or a carbon tax – and that will create direct liability: “Over the next five years or so around 40% of the world’s CO2 emissions will be under some form of compliance regime.” However, that direct liability can be priced, forecast, and put into a model so investors can prepare by adjusting "credit metrics accordingly by what assumption will be for future carbon prices.”

Neil Griffiths-Lambeth, Associate Managing Director, Moody’s, pointed out that measuring the risks of carbon should not be restricted to finance but must also be applied to the wider business sector where it has a huge, long-term impact – and can again be analyzed through the lens of methodologies. He asserted: “Carbon isn’t a single thing, it runs across the entire gambit of a business’s activities.”

Ending the session by looking at how carbon policies affect corporate credit ratings, Nicole Rottmer, CEO, The CO-Firm and Bozena Jankowska, Director Global Co-Head of ESG, Allianz Global Investors, outlined how their particular model is currently analyzing what companies are doing to mitigate climate risk and adapt to it. While the model will soon be expanded to a broader range of companies, it helps companies understand the risks, adaptation costs and financial implications of reaching necessary climate targets, using a choice of clear scenarios, sectors and companies.

While the speakers unearthed the importance of modelling and comparing the financial risks of a changing climate for investors and companies, according to the experts gathered in Paris today, moving portfolios away from fossil fuel assets and into low carbon, high return-rate renewables clearly offers the smartest investment choice. 

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By Clare Saxon Ghauri


Climate Week Paris, which is convened by The Climate Group, takes place from May 18-24, 2015. See the full calendar of events including further Twitter Q&As, by visiting ClimateWeekParis.org

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