The United Nation’s Cancun Accords, once again shed light on the topsy-turvy world of international climate change policy. Significantly, the Accords move a step closer to binding emissions targets and recognise the need for monitoring and verification, stating that “internationally supported mitigation actions will be measured, reported and verified domestically and will be subject to international measurement, reporting and verification.” Having done my time auditing forest management in Indonesia, I am heartened to see the progress made to address the crucial issue of forest conservation. Reducing Emissions from Deforestation and Degradation, or REDD, establishes protocols for national forest protection plans and associated monitoring through satellite imagery. Crucially it invites developed nation governments and the private sector to invest in standing forest as a carbon sink, rather than source of timber.
At the same time Cancun also recognised the urgent need to start adapting to the consequences of climate change. The insurance industry has been engaged in order to get under the skin of the risks associated with extreme weather events. This is an area into which these companies are making significant investments. The main players in the insurance industry have clubbed together into ‘ClimateWise’ to share experiences in order to gain greater insights and respond to climate change. The 2010 independent review of ClimateWise describes the actions taken by different companies in relation to the schemes ‘principles’. These refer to risk analysis methods, informing public policy, supporting customer awareness, reducing the environmental impact of the businesses, reporting and incorporating climate change into investment strategies.
The latter is interesting, as it conjoins the wider debate about the relevance or otherwise of ‘sustainability’ within the context of a company’s performance. The impact on shareholder sentiment of major environmental incidents is self evident, however, the eco-sceptics, still see it as secondary to financial performance. What happens however, when extreme weather events create havoc with retail sales or productivity, the cost of extra heating takes a percentage point off the bottom line or illegal dumping of waste leads to a legal battle, hitting reputation and adding to the professional services cost line? The insurance companies have got it right, because they see climate change and sustainability as a ‘risk’ factor, not some woolly jumpered, yoghurt knitting concept.
The move to embrace adaptation is mirrored elsewhere. While the insurance companies have a clear stake in the implications of climate change – more intense rainfall, flooding, freezing and stifling hot temperature extremes. Other financial companies are also taking it seriously. The banks, over and above their own insurance businesses, are looking at the effects on the productivity of their business clients, mortgage deals on certain properties, asset finance for snow ploughs, corporate finance for novel irrigation systems and of course the ongoing flight to renewable energy.
The venture capitalists are not immune. They are seeing a rash of clean energy, environmental services and smart grid business plans, in other words, technologies that are designed to reduce carbon emissions or help people and companies adapt to changing weather patterns. These may be rapidly mobilised flood defences, under-floor heating for roads, cloud based energy monitoring systems, smart electricity distribution and runways and drainage systems for new houses. These plans and concepts are designed to reap commercial reward from climate change and environmental regulations and associated pressure from the supply chain.
The investment banks and fund managers will be monitoring regional and national climate trends in order to assess the operating context for their portfolio companies. They will also be putting money into REDD projects and fundraising for established clean technology and clean energy companies, not to mention taking some of them into the public markets.
All this of course provides such Scottish based financial companies with a huge opportunity to grow their businesses – with a slight change in attitude towards the sustainability agenda. While their oil and gas clients will continue to flex their muscles, the value of this business is in long term decline. The value of climate adaptation and sustainability based business is on a long term growth trajectory. For those institutions that are willing to look beyond tomorrow’s bonus and whom have the guts to sell this to their shareholders [many of whom will provide a sympathetic ear], the opportunities abound. Sustainability is one foundation stone on which Scotland’s re-shaped financial future can be built.
