Thursday, January 16, 2014

Financing the Low Carbon Economy: The 2014 Clean Trillion Report

More investment is needed to avert the worst impacts of climate change. Without such investments we will not be able to avoid a temperature increase of more than two degrees Celsius (2 °C) above pre-industrial levels (this is the upper threshold agreed upon by scientists and governments in 2010).

On Wednesday January 15, the non-profit investment group Ceres launched their latest Clean Trillion Report, entitled Investing in the Clean Trillion: Closing The Clean Energy Investment Gap. The report incorporates data from the International Energy Agency (IEA). The Ceres report was released as investors met in New York for a conference on climate risk where they called for a fossil fuel stress test.

To have an 80 percent chance of staying within this 2 °C limit we will have to build a low carbon infrastructure which will cost a total of $36 trillion by 2050. To be successful in this effort we will need to see an average investment of 1 trillion a year.

While we have seen impressive growth in the wind and solar industries in the past few years, we will need to see much more if we are to make the transition away from fossil fuels towards a truly low carbon economy. Global investment in renewable energy fell 12 percent in 2013. According to Bloomberg New Energy Finance (BNEF) a total of $281 billion was invested in 2012, that is $719 billion short of the amount needed each year. In 2013 it fell to $254 billion which is $746 billion below where it needs to be. However, it should be noted that BNEF’s clean-energy numbers do not include most energy-efficiency measures, fuel-efficiency gains or expanded public transportation. However, if we include energy efficiency, investments in clean energy are probably closer to $500 million. Even if we factor energy efficiency there is a seemingly insurmountable gap. Nonetheless there are some positive signs, not the least of which is declining renewable energy costs.

As stated in the executive summary of the Ceres report:

"These new investments in clean energy—including renewable energy such as solar, wind and geothermal, energy efficiency and energy smart technologies such as power storage, fuel cells and carbon capture and storage—will provide multiple benefits. In addition to cutting greenhouse gas emissions in half by 2050, such investment will yield significant returns in the form of reduced fuel costs. Total fuel savings are an estimated $100 trillion between 2010 and 2050. Moreover, the greater job-creation potential of energy efficiency and renewable energy relative to fossil fuels makes clear that quadrupling annual global investment in clean energy will create millions of new jobs worldwide."

Put simply, the clean energy capital from commercial banks, national and multilateral development banks and electric utilities are inadequate. We will need to double annual global clean energy investment by 2020 and quadruple it by 2030, the report said.

To help bridge the gap between what is needed and what is actually being invested, Ceres, made seven largely market based recommendations for the private sector and three for governments. An important part of the solution involves getting institutional investors on board. This must include big investors like those who manage pension funds and sovereign wealth funds, which together manage $75.9 trillion globally. Ceres recommended that these institutional investors should set firm goals like allocating at least 5 percent of their portfolios to clean energy investment. (They currently invest less than 1 percent, according to the OECD).

The report also recommended that investors pressure energy companies to disclose their carbon footprints and they specifically addressed the risks associated with "stranded assets." The report also suggested that investors expand the current $2.5 trillion covered bond market for clean energy investment.

To download the full report click here.

© 2014, Richard Matthews. All rights reserved.

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