Climate Change: Paris and the long-term view
The year 2015 is pivotal for the climate movement.
Governments around the world are gearing up to discuss an international climate change policy in December in Paris, and chances of a successful negotiation have never been higher. Regional carbon regulations and significant announcements, including the 2014 U.S.-China climate agreement, have been instrumental in building momentum.
Paris should not be considered the endpoint of the climate action movement, however. It should be the start of an orderly transition away from carbon that will last the rest of this century. International negotiations need to provide long-term answers to address the issues institutional investors are facing. In particular, the Paris outcome should lay a framework for governments to provide the long-term policy certainty that is so urgently required.
The long-term view is very important to Ontario Teachers' Pension Plan because our primary objective is to invest on behalf of more than 300,000 active and retired teachers. We need to earn returns to pay members' pensions now and many decades into the future.
We view climate change as a potentially significant risk to our assets and our ability to earn sufficient returns to pay pensions over the long run. The lack of long-term certainty in government policies affects investors on two fronts: as we manage risk of our current assets, and as we gauge this risk in our search for new opportunities.
Our portfolio, especially long-term assets such as infrastructure, will be affected by physical climate change risks, including extreme weather. Science tells us the physical impacts will only increase as time passes, presenting investors with a broad and diverse set of risks. We outline some of these risks in our thought piece "Separating the Real Risks for Investors from the Noise." An international, coordinated effort to combat climate change will lessen these physical risks, while enabling investors to better assess regulatory risks. Both sets of risks have implications for non-energy sectors such as transportation, agriculture, real estate, consumer goods and others.
Pension funds can also play a vital role in supporting an orderly transition to a low-carbon economy. We believe that climate change will present new investment opportunities as the world adapts to and mitigates climate change effects. However, policy uncertainly makes it difficult to assess the potential value of investments and make good investment decisions. These conditions increase the hurdle rate for investors to release capital for investments that could help to adapt and mitigate climate change impacts.
The media spotlight has rightly been focused on the Paris meeting, but climate change will produce physical and regulatory risks for decades afterward.
In the final weeks before the Paris negotiations begin, we encourage governments to seize the opportunity to reduce investment uncertainty and support long-term decisions about value creation with clear, transparent and long-term climate change policies. This will allow Ontario Teachers' and other long-term investors to play to their strengths in assessing risk and allocating capital to new investment opportunities.
With governments' help, investors can do much more to protect assets and tackle climate change over the long term.