Report by UK

First Order Draft, Cross-cutting Investment and Finance Issues:
UK
Throughout this chapter there is a confusion between the public sector funding of the gap in cost between clean energy and polluting energy and the private sector providing investment funds to invest against those "subsidy" mechanisms. This is a common and very damaging mistake which I am afraid permeates the whole chapter in this case. I think the distinction between these two very different things needs to be made early and then applied rigourously throughout. I will hig
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
This chapter is a welcome addition to the work of WGIII – and could play a significant role in ‘speaking finance to the climate community’ and ‘speaking climate to the finance community’. To do this, the chapter needs to have a stronger focus on how the low-carbon transition intersects with capital markets, the barriers to ‘climate finance‘, how financial stakeholders can be incorporated into policy design and how climate risks can be better addressed by finance
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
At its heart, effective climate finance ensures that the conventional risk:reward in all financial decision-making dynamic is transformed so that mitigation is assured. Historically, the risk:reward balance had weighed against low-carbon options; this has been remedied to some extent through policy intervention to internalize external costs. But high carbon options in nearly all economies are often seen to have a better risk:reward ration than low-carbon options.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Global Capital MarketsIt is important to set out the size and structure of global capital markets in terms of key asset classes (equities, bonds, private equity, infrastructure, debt etc). The latest McKinsey Global Institute Report estimated that the total size was USD212trn: it is critical to incorporate this scope as it then places the challenge of ‘climate finance’ in context – and highlights that the scale of funding required is relatively small (eg 16.2)
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
http://www.mckinsey.com/insights/mgi/research/financial_markets/mapping_global_capital_markets_2011
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
The relatively low amount is particularly striking if one considers that the share of investment in GDP has been historically low in recent year and will need to rise in coming decades: see Jorgen Randers, 2052 (2012) for some useful estimates.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Key Financial Stakeholders: It is also important – perhaps diagrammatically – to set out the key actors in climate finance, and how they comprise the investment chain from:
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- asset owners (pension funds, insurance companies, sovereign wealth funds, foundations, states, private individuals)
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- actuaries and consultants which advise asset owners on strategic issues, including climate change See Mercer, Climate Change Scenarios – Implications for Asset Allocation, 2011
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- asset managers, across equity, bonds, private equity etc
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- banks, who provide investment analysis, raise capital for new assets in the form of equity and debt, provide leveraged finance drawn their own balance sheets and trade existing investment instruments
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- corporations,
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- ultimate assets and projects
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
The OECD’s Financing Climate Change Action programme also has some useful papers that frame the agenda
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
http://www.oecd.org/env/climatechange/financingclimatechangeaction.htm#Papers___pubs
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
One stakeholder that is omitted from the chapter at the moment is the individual consumer/housbehold as source of finance/investment. CF is not just an institutional issue; HSBC estimates that a third of the spending on low-carbon energy supply and consumption by 2020 will be by households (eg building retrofit; cleaner vehicles – HSBC, Sizing the climate economy, 2010 available at
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
http://www.longfinance.net/programmes/london-accord/392.html).
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Climate Finance: It is important to re-examine the concept of ‘climate finance’. The Executive Summary (l.33) admits ’there is no agreement on what qualifies as CF’, but the chapter perhaps unconsciously assumes in many places that it is in effect public finance. At the heart of the problem lies uncertainty as to what climate finance includes in its orbit. I would suggest the following: ‘ Climate finance is the allocation of financial assets to activities that enabl
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
It is critical to recognize that this definition does not include – and nor does the draft chapter – a discussion on ‘climate finance risks’, in other words the risks that the transition to a low-carbon, resilient economy pose for finance and investment: I will address this in my final section. I would also suggest that the chapter is more disciplined in defining the elements of CF, breaking it into the following categories. - Type 1: domestic private climate finance;
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- Type 4: international public climate finance
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
This categorization is perhaps implicit in parts of the chapter – but it would be valuable to have an iron-cast framework that applies throughout.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
It is also important to clear up some confusion in the language: ‘financial flows’ refer only to cross-border Type 3 & 4 CF. In addition, in the discussion of innovative sources (16.2.3.2) this is effectively only about innovative sources of public CF. And finally, private finance often funds the public in large measure through public bond issuance, for example, either through sovereign bond issuance and/or issurance from public financial institutions. This is important t
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
The key point that needs to be highlighted in the next draft for 16.8 on Gaps in Knowledge is the absence of a common system used by public and private sectors alike for categorizing and monitoring
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Investment, Costs and Returns: The significant insight in the second paragraph of the Executive Summary of the difference between cost and investment (l.6>) is sadly lost in the rest of the chapter. One structural feature of the low-carbon, green economy is that it substitutes capital for resource use and carbon pollution: the low-carbon economy is thus generally a more capital-intensive economy, with one of the key strategic issues being how to raise this additional upfront
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Barriers to Climate Finance: The chapter lacks a clear analysis of what is preventing finance to flow at sufficient scale and speed to the right places for comprehensive mitigation. I would suggest the following
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- structural market failures (eg the externalities identified in previous chapters of AR5, as well as the policy failures such as fossil fuel subsidies)
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
- financial market failures: these would include short-termism, bounded rationality, regulatory blindness, perverse incentives, obsolete interpretations of fiduciary duty, institutional inflexibility, transparency and path dependency. These are the barriers that this chapter should focus on removing.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
To highlight some of these in more detail
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Short-termism: This has been highlighted as a structural flaw in financial markets for decades, making it hard for investors to effectively assess and act upon the durational challenge of climate change. Financial myopia was identified by J.M Keynes as a key reason for structural imbalances in Chapter 12 of The General Theory of Money and Employment published in 1936. “It is the long-term investor, he who most promotes the public interest, who will in practice come in for
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
This structural flaw could be addressed by incorporating in financial regulation a requirement on the investment chain for asset owners, managers, banks etc to assess and integrate the long-term challenge of climate change into their routine operations.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Bounded rationality: It would be worth referencing the latest insights of behavioural finance and the explanations these give for inadequate attention to climate change, and the failure of conventional financial theory (such as the efficient markets hypothesis) to root its notions in empirical evidence. James Montier Behavioural Investing is a good reference, and could be cross-referenced with the useful section on behavioural economics in Chapter 3.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Perverse incentives: These are both public and private. Currently, finance and investment receives considerable fiscal support to encourage saving, an important public policy objective: in the UK, this amounts to £30bn p.a.. However, unlike in other policy areas such as energy, there is still little or no integration of environmental or climate factors into how this fiscal support is allocated. One solution to this would be to ensure that to qualify for tax relief savings an
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Regulatory blindness: A similar theme – unlike the agriculture, energy and transport sectors, little or no attention has been given to integrating climate change into core financial regulation. This has led in the case of the banking sector to new rules under Basel III which are discouraging banks from holding long-term project finance debt – a key source of funding for climate mitigation. This is clearly not something that can be dealt with in formal climate negotiations
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Transparency: Without transparency on climate factors, financial markets cannot effectively integrate migitation into decision-making. Considerable progress has been made on a voluntary basis through initiatives such as the Carbon Disclosure Project, and some countries are introducing mandatory climate/sustainability requirements. These need to be universalized so that financial markets can make informed decisions: again worth highlighting in 16.6.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Finally, the important point about highlighting financial market barriers is to make clear to policymakers that simply addressing the first order climate externalities will not be sufficient to achieve mitigation; there are many obstacles in financial markets which will obstruct this signal being received.
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Incremental Cost: The chapter explores the problematic nature of this term – but it needs to be made clearer the difference between incremental cost and incremental investment, the latter is a classic form of financial deployment from which net benefit is expected. And although carbon externalities are certainly deep and widespread, technological innovation is such that low-carbon mitigation options are increasingly without ‘incremental cost’ – although there may be
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Institutional Arrangements: The chapter could benefit from recognizing the growing evidence of private finance sophistication and demand for policy in the area of climate change, particularly institutional investors. Hitherto, institutional investors have been the ‘missing stakeholder’ in climate policy formation and delivery, with policymakers not addressing the barriers that investors face to contribute to climate security. As owners of corporations, investors need to b
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 1
UK
Climate Risks: The chapter as currently structured focuses on how to mobilize finance behind key thematic investments in the low-carbon landscape. It doesn’t, however, examine the flip-side: the risks facing high-carbon finance. One important expression of this is the topic of stranded assets. The absence of credible long-term policy frameworks compounded by financial myopia means that financiers and investors discount the possibility of robust action to hold global warming
View full comment by Nick Robins...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 13 , Line 20 To Page 13 , Line 20
UK
This diagram is very confused. It makes no sense to add tax revenues spent on funding clean energy investments with private capital which is looking for a return to invest against those cash flows. I would recommend that this diagram is removed as it makes no financial sense.
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 15 , Line 20 To Page 16 , Line 49
UK
Again this section confuses sources of public funding with private investmnent which are two totally different things.
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 17
UK
There is at least one potential international funding source not mentioned here, which is to incorporate importers into domestic carbon pricing schemes but make the money raised at the border available for international climate finance. See Michael Grubb (2011): International climate finance from border carbon cost levelling, Climate Policy, 11:3, 1050-1057.
View full comment by Michael Grubb...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 17 , Line 3 To Page 17 , Line 43
UK
These are all sources of public funds which can be used to fund subsidies. They are not sources of investment, they are simply ways for governments to raise money.
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 18 , Line 2 To Page 18 , Line 9
UK
It is worth noting here that different types of investors will have different appetites for risk. Institutional investors may have requirements to conform to certain benchmarks defined by the designated asset class.
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 18 , Line 38 To Page 18 , Line 46
UK
AMCs are a subsidy mechanism they are not a financial instrument
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 18 , Line 45 To Page 18 , Line 45
UK
INSERT AFTER 2009). "However, FITs still present some extrinsic risks to investments, for example the possibility of retroactive changes to FIT levels on existing projects, as was instituted by Spain in 2010, damaged investor confidence in renewable energy projects on a broader scale." CITATION: IIGCC (2010). Shifting Private Capital to Low-Carbon Investment. Available at: http://www.iigcc.org/__data/assets/pdf_file/0016/12247/IIGCC-Position-Paper-on-EU-Climate-and-Energy-Pol
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 19 , Line 2 To Page 19 , Line 2
UK
INSERT AFTER: ...public benefit funds. “Key features of the sustainability of Germany’s FIT scheme are a clearly stated tariff digression over time to match all reductions in technology costs and an end target of renewable energies achieving grid parity with fossil fuels.” CITATION: IIGCC, INCR, IGCC and UNEP-FI (2011). Investment-grade climate change policy: Financing the transition to the low-carbon economy. Available at: http://www.iigcc.org/__data/assets/pdf_file/00
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 19 , Line 4 To Page 20 , Line 28
UK
The first six mechanims mentioned are ways of providing subsidy for clean energy / efficiency and the last two are forms of financing . Again, they should not be in the same catergory.
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 20 , Line 39 To Page 20 , Line 39
UK
Therefore it is important to understand the asset allocation requirements for institutional investors on infrastructure investments, notably specific liquidity and ownership requirements and leverage ratios. SOURCE: NAPF News (2012) Issue 1 “Pension Funds and Infrastructure.”
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 22 , Line 12 To Page 22 , Line 18
UK
According to Ürge-Vorsatz et al, in an appraisal of 20 regulatory instruments, a diverse portfolio of policy instruments is the most effective way to drive CO2 reductions in buildings, with the most cost-effective being appliance standards, demand-side management programmes and mandatory labelling. See, Ürge-Vorsatz, Koeppel and Mirasgedis (2007). Appraisal of policy instruments for reducing buildings’ CO2 emissions, in Building Research & Information, 35:4, 458-477.
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 22 , Line 19 To Page 22 , Line 27
UK
To complete the bullet points in this section, allow me to suggest a recent paper compiled by IIGCC’s Property Working Group: IIGCC (2012). Enhancing the real estate sustainability policy framework. Available at: http://www.iigcc.org/__data/assets/pdf_file/0005/15377/IIGCC-enhancing-the-real-estate-sustainability-policy-framework.pdf This paper outlines 7 barriers to scaling up finance in energy efficiency as identified by institutional investors: Policies that inadequatel
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 22 , Line 9 To Page 22 , Line 9
UK
There is also a need to differentiate ownership agreement because renters and owners operate under different incentives in terms of investing in energy improvements, and trends in property ownership vary drastically across markets.
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 26 , Line 10 To Page 26 , Line 14
UK
To enable mitigation finance, government needs to a) evolve TRANSPARENT policy, fiscal, legal and educational frameworks THAT ARE ALIGNED WITH WIDER POLICY GOALS INCLUDING ECONOMIC, ENERGY, RESOURCES AND TRANSPORT POLICY OBJECTIVES b) build institutional capacity across sectors and at various levels; c) proactively respond to the needs and preferences of ACTORS BY PROVIDING INCENTIVES TO INVEST WHICH RECOGNIZE AND COMPENSATE FOR ANY ADDITIONAL RISK INVOLVED IN THE INVESTMENT
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 26 , Line 31 To Page 26 , Line 31
UK
...performance, and facilitating markets."
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 27 , Line 48 To Page 27 , Line 48
UK
Additionally, private investors may have a difficult time financing energy projects in developing countries because of less developed local banking sectors.
View full comment by Morgan LaManna...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 4 , Line 32 To Page 4 , Line 45
UK
I think that this is confusing fiannce with aid flows
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 5 , Line 24 To Page 5 , Line 30
UK
Some of the tools mentioned are public and some are private. The paragraph implies that there are some which are common which is not the case.
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 8 , Line 12 To Page 8 , Line 17
UK
This again confuses aid flows with financing.
View full comment by Ian Temperton...

First Order Draft, Cross-cutting Investment and Finance Issues: From Page 9 , Line 21 To Page 9 , Line 42
UK
These paragraphs mix the funding of the cost gap between clean and dirty and actual financing investment throughout
View full comment by Ian Temperton...

Breakdown for UK