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Climate change: we have to pay the bill and take advantage of the opportunity

Companies have to revise their business models and the publications of their financial results in order to consider the risks and opportunities related to climate change


By CARLA SCHUCHMANN AND GUSTAVO PINHEIRO*


There were many announcements of commitments from the private sector made during the Climate Action Summit, organized by the UN Secretary-General, which brought together the global political and economic elite in New York in September. A group of 16 large pension funds and insurance companies met at the AOA Net-Zero Asset Owner Alliance), which are jointly responsible for the management of US$ 2.4 trillion, has committed to neutral investment portfolios in carbon by 2050. On another front, the 373 investment companies gathered at the Climate Action 100+ (created in 2017) published their first report - - these investors have been trying to influence 161 global companies (including Petrobras, Suzano and Vale) to make their operations cleaner (implementing the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), published by the Financial Stability Board, (FSB)). The challenge of climate change and the urgency of action can no longer be ignored.

According to a recent report by UNEP (the United Nations Environment Program), the global emissions of greenhouse gases need to peak by 2020 and diminish rapidly thereafter, in order to limit the increase of the global average temperature to 1.5°C above the pre-industrial levels. Combining the effects of climate change in the returns of long-term investments, it can be observed that the current risk assessments do not adequately consider the risks related to the climate, due to the limited disclosure of information.

Investors need better information about how companies are preparing for a low carbon economy. The companies that evaluate and disclose risks related to the climate have a competitive advantage. Those that acted early have already begun to reap the benefits in market value. In the market of public and private bonds, a movement has also been observed in the allocation of assets, gradually aligning with the objectives of the Paris Agreement. The issue of green bonds has been growing in the world market, year after year, and this movement has also been observed in Brazil.

The issue of green bonds in 2019 reached US$ 186 billion by the first week of October and exceeded the volume of the entire year of 2018. The Climate Bonds Initiative (CBI) estimates an amount of US$ 250 billion by the end of this year (these figures are worthy of respect, but negligible when compared to the total amount of bonds issued in the US market, of US$ 2.4 trillion in 2018). Latin America accounts for only 2% of the global issues of green bonds, which are led by Europe and Asia.


Brazil maintains the leadership in the region: of the total of US$ 13.3 billion in issued green bonds since 2014 in Latin America, the country was responsible for US$ 5.8 billion, compared to US$ 3.1 billion from Chile and US$ 1.8 billion from Mexico. They are disappointing figures for a continent that urgently needs to create jobs and improve infrastructure. The advance of the decarbonized assets, or in accordance with the objectives of the Paris Agreement, can represent a significant opportunity to recover productive investment and the path of economic growth in Brazil. There is an enormous range of investment opportunities in the low carbon economy that has still not been exploited.


Dmitri Kessel/The LIFE Picture Collection/Getty Images

Most of the investments made until now have concentrated on the sectors of land use, particularly in forests planted for paper and cellulose. The renewable energy sector, which has grown significantly in recent years with the drop in prices of wind generation and photovoltaic solar equipment, also stands out in the demand for capital. There are still significant opportunities in the sectors of transport (notably in the modernization and electrification of public transport fleets), sanitation (universal water and sewage services are still some way off), and the collection and recycling of waste. These are sectors that depend on regulatory reviews and could leverage hundreds of billions of reais in investments in the coming decades, contributing to the economic recovery and generating a series of co-benefits in productivity gains and the reduction of expenses with public health. Recently the ex-Finance Minister, Joaquim Levy, proposed in an article that "from 2020, the financial instruments, institutions and regulations should be aligned with the zero net emission of carbon into the atmosphere and, if not, there must be plans to achieve this alignment." It is an elegant manner of indicating a specific objective so that the financial sector understands the size and the urgency of the challenge.

With the objective of engaging and training professional investors to achieve the decarbonization of their portfolios, aligning them with the objectives of the Paris Agreement, the Investors for the Climate (IPC) initiative was launched in São Paulo in October, with the Technical Coordination of Sitawi in partnership with the CDP, the Institute for Climate and Society and Principles for Responsible Investments (PRI, which is one of the international networks of investors that support Climate Action 100+). At the first meeting, the relationship between climate change, economy and investments was discussed, and the paths to the decarbonization of portfolios in Brazil in different classes of assets -- without any loss of profitability. The required support for the national investor to act on this agenda was also identified, which is to be implemented in the coming months. The financial mainstream has already agreed to the urgency of combating global warming, under the risk of significant economic losses. The incorporation of climate risk to the pricing of financial assets is an indispensable measure to protect the interests of investors.



*Carla Schuchmann is the manager of Sustainable Finance at Sitawi – Finance for Good; Gustavo Pinheiro is the coordinator of the Low Carbon Economy Portfolio at the Institute for Climate and Society


This article was originally published in the website Época Negócios, on December 17, 2019.

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