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the ocs blog

Green Investment: Event summary

10/2/2020

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By Tilly Alexander
Picture
Hot on the heels of five days of student divestment protests at St John’s College ending in triumph on Sunday, the Oxford Climate Society’s Green Investment panel couldn’t have been more timely . Subtitled ‘What role can finance play?’, Monday’s event saw its panelists engaged in a lively discussion exploring how investors can, should and will help mitigate the effects of climate change.
 
The evening’s panelists included Dr Elizabeth Harnett, James Hulse, and Rupert Stuart-Smith. Leader of the Future of Engagement programme at the University of Oxford's Smith School of Enterprise and the Environment, Dr Harnett’s work focuses on bridging knowledge gaps between academia and industry. Industry expert James Hulse also provided the discussion with a professional touchstone. He was a proprietary trader for 14 years before moving on to set up the world’s first climate change hedge fund in 2007 and more recently Hindsight Consultancy, for which he is managing director. (Hulse notes of the name that, “in hindsight” all current movements towards green investment and protecting the climate “seem staggeringly obvious”.) Rounding off the panel was ex-OCS president and co-ordinator of the UK Youth Climate Coalition Rupert Stuart-Smith, currently working as a research assistant at the Oxford Martin Program on the Post-Carbon Transition.
 
The discussion was kicked off with the question: Why aren’t investors incentivised to care about climate change?

As Hulse highlighted, it comes down to timescales, money, and “lads” mentality. Generally everyone within the industry is working to a short timeline (up to around five years only). What’s more, as a fund manager, your job is effectively to not do significantly worse than the global markets, and you get paid around £400,000 to do that. This means there’s little incentive to do anything other than the same as the rest, just slightly better. In fact, the last thing you want to do is something different: if you take a risk and it works you’ll probably still get paid the same, while if it fails you’re likely to get fired. (In other words, it’s not a very good personal investment.) However, the flipside of this sheep mentality is that when everyone starts making changes, you’re incentivized to do the same. With oil and gas the worst performing sector for three consecutive years, there is increasing incentivisation to get out of it.
 
According to Harnett and Stuart-Smith, additional reasons include: a lack of belief that risks will actually materialize, and a lack of knowledge about the Paris Agreement and climate change, a lack of data to go off. As Harnett pointed out, with over 400 different companies providing sustainability metrics (with no universal standard), investors are “comparing apples to pears”.
 
Discussions then moved onto:
What is forcing investors to change their behavior?
The three panelists agreed the Paris Agreement was pivotal. Hulse stated that “Paris changed everything for investors. We can argue about the speed but not the direction of travel. Governments around the world have committed to this.” Articles 2 and 4, which detail the need to keep the global average temperature below 2 degrees above pre-industrial levels and provide scientific support for the urgency of reaching Net Zero within three decades respectively, were particularly praised.
 
Stuart-Smith also highlighted the growing number of lawsuits seeking to hold big oil companies accountable for the environmental damage impacting millions that they have caused but not had to suffer from individually. (See New York City’s case against Shell, Exxonmobile and three others in 2018, for example.) When these companies actually have to pay for the risks they take, they will no longer be able to remain profitable. Indeed, faced with numerous lawsuits following the California wildfires in 2018, PG&E (Pacific Gas & Electric Corp) was forced to declare bankruptcy. The falling cost of renewables is also accelerating this transition and exposing fossil fuel incumbents.
 
The focus then turned to: What are investors doing currently doing and what should they do to integrate climate change into their decision-making process?

To integrate climate change in the decision making process, its vital to consider the environmental, social and governance criteria (ESG). These 3 factors are used to measure the sustainability and social impact of an investment.
 
But how does it work in practice? Hulse noted that though you “can start to measure things” such as carbon emissions, yet these measurements don’t say much about the environmental risk side. Stuart-Smith elaborated on this issue with the example of TPI Tool. Academically based at LSE, the tool assesses companies’ compliance with the Paris Agreement. However, this only spans 5 years into the future, which simultaneously tells you nothing and is misleading (companies tend to look good in the short term). Most significant so far is that banks have withdrawn money from new coal plants. But companies need to have far more ambitious plans. Dr Harnett highlighted the importance of investing in nature-based solutions such as carbon sinks, a discussion that was just beginning in 2019. However, given it is harder to measure results here in terms of financial attribution – you can’t say “I saved this acre of rainforest” – she noted that ways will need to be found to incentivise investors.
 
What about individual investors and “average people”?
Divestment was recommended by all three panelists. Though “underrated”, it is also “clearly having an impact”, as declining coal share prices indicate. Such change has been triggered not by the collapse of the coal market (which is, sadly, still alive and kicking) but by divestment. As Hulse noted, much to the audience’s amusement:

 “You’ve got to be an idiot if you think Exxon is one of the best companies out there. You shouldn’t be managing money for other people if you think that.”

All three also highlighted the different ways in which the individual can exert influence: ask your parents where their money’s invested, use your power as a consumer to signal to investors, campaign, vote in way that helps green policies. Students can also talk to colleges, often sitting on huge endowments, with much of their money tied up in fossil fuels.
 
The panelists were subsequently asked to expand on the problems that financial institutions face when trying to integrate climate change.  “Where to start”, Hulse noted, likening it to the birth of the internet and the tech boom: “climate change changes everything for every business”. It’s not just big oil companies like Exxon that will be affected but delivery services like FedEx, airlines, the steel, concrete and automobile industries, even agriculture (often forgotten about alongside other sectors). We will still need steel, concrete, food, so how do we offset it? Yet at the same time companies can’t be allowed to get away with just saying they’ll offset. The potential for disruption is enormous and it doesn’t take much for civil unrest to start, all of which investors are trying to navigate. Dr Harnett also pointed out another huge underlying issue: many investors simply don’t understand the science. Investors and climate scientists effectively speak different languages and the complexities haven’t been sufficiently translated. 
 
Endeavouring to end on a positive note, the panelists were finally asked about positive trends towards green investment.
​(This was initially met with silence, to the audience’s amusement.) Noting that investors respond to societal behaviour, the panelists praised millennial efforts including the fly less movement, surges in veganism, demand for fossil fuel free products and huge changes in expectations around plastics. Activists like Extinction Rebellion and Greta Thunberg speaking out have also got companies scared. While there is “a lot of bullshit” aka greenwashing, this still represents a positive shift as it means companies are scrambling to respond to consumers, wanting to be seen as green while they figure out how to actually change. Millennials are also demanding that the businesses they choose to work for represent their values, with fossil fuel companies finding it increasingly difficult to find people to hire. Even countries like Saudi Arabia, Greece, Qatar are making plans to divest their stock in the fossil fuel industry – a
huge shift, unimaginable two years ago. The growing body of scientific evidence able to demonstrate that climate change isn’t just bad luck but the impact of a small group of big companies, as well as rising number of climate litigation cases is also positive. The only thing missing is a political mandate that will put an end to the fossil fuel industry.
 
Now at risk of losing their social license if they fail to think about ESG factors, financial institutions are ultimately on track to change for the better. While 15 years ago no one in finance was aware of climate change, now everyone running serious amounts of money needs to be.
 
 
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What you need to know about...The Stern Review

10/2/2020

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By Bianca Pasca
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The science behind climate change often dominates climate news. But increasingly, the economic impact is coming to the fore: and we have The Stern Review to thank for this.
  • What is The Stern Review?
The Economics of Climate Change:The Stern Review is a report published in 2006 and led by Nicholas Stern then Head of the UK Government. In the report, the economic costs and risks of not acting on the problem of climate change are balanced against the benefits of serious, early action- it was actually the first report of its kind to do this!
The review was commissioned by the British government, to report to the Prime Minister, Tony Blair, considering the problem from a medium- to long-term perspective. It used economic models- including integrated assessment models- to estimate the economic impact of climate change and macro-economic models to assess the costs and effects of the transition to low-carbon energy systems for the economy as a whole.
  • What were its findings?
The Stern Review is massive- on the scale of 700 pages long. Its key conclusions are:
  • The benefits of strong, early action against climate change outweigh the costs of implementing the necessary changes.
Concretely: Reducing CO2 emissions to 450-550 ppm (parts per million) would cost 1% of GDP each year (by more recent estimates even more, but still insignificant compared to the costs of doing nothing)
Inaction could cost 20% of GDP each year.
  • (Note, though, that 550 ppm emissions – double the number of pre-Industrial emissions -imply a global temperature increase of 3°C, way more than what is considered acceptable by climate science)
Stern therefore suggested that the cost of inaction would be far greater than the initial costs of making the necessary reductions to emissions, EARLY.
This was highly significant because it changed the perception of climate action from an economic burden to an economic benefit and ultimately an economic necessity
  • The damages from climate change will accelerate as the world gets warmer-delaying action increases the cost of lowering emissions so immediate action is needed.
  • The poorest countries and people will suffer most of the consequences, earlier on, although at first, they might have small positive effects for a few developed countries, in higher latitude regions (Russia, Canada, Scandinavia- short-term higher agricultural yield, lower heating costs)
  • The transition to a low-carbon economy may pose challenges at first, but might ultimately provide opportunities for economic growth
  • Economic growth is currently driving rises in emissions but maintaining a constant, lower level of greenhouse gas emissions in the atmosphere is feasible and even compatible with economic growth. With strong, deliberate policy choices, it is possible to ‘decarbonise’ both developed and developing economies on the scale required for climate stabilisation, while maintaining economic growth in both.
    • some suggest it is now too late for economic growth to be compatible with the reduction of emissions required
  • Policy to reduce emissions should be based on three essential elements:
  1. carbon pricing
  2. technology policy (focusing on research and development, designing low-carbon technologies cheaper than the fossil fuel alternatives)
  3. removal of barriers to behavioural change.  The carbon price must signal the social cost of our actions. It would discourage emissions, give an incentive to invest in new technologies to reduce carbon and remove barriers to action, transaction costs, and behavioural and organisational inertia
  •  Adaptation policy is crucial for dealing with the unavoidable impacts of climate change, but it has been under-emphasised in many countries
  • Curbing deforestation is a highly cost-effective way of reducing greenhouse gas emissions.  (Emissions from deforestation are estimated to represent 6-17% of global emissions). Policies on deforestation should be shaped and led by the nation where the particular forest stands. But those countries should receive strong help from the international community, which benefits from their actions to reduce deforestation.
 
  • What is its legacy?
 
While there was much debate after the publication of the report and there still are diverging opinions (after all, a lot of the consequences are still unknown, unpredictable and hard to assess, especially from an economic point of view), The Stern Review did have an important impact.
  • It opened the door for more projects of its kind, like the Risky Business Project, “The Stern Review for the U.S.” Basically, it encouraged economic conversation about the implications of climate change, urging policy change
  • Like we said in the beginning, it redefined climate change as an economic issue, not just a scientific one and it was the first economic report to do so
  • It opened up the debate about how we value the future, as opposed to mere short-term profit
  • It changed the way research impact was understood, in terms of the need for more advanced technologies in order to reduce the negative impact on climate
  • It outlined the importance of early action against climate change, also warning about the consequences of ignoring the problem.
Therefore, despite some critics calling the Stern Review too extreme and others too lenient in the way it views climate change consequences or actions needed, The Stern Review still remains an important piece that has opened up the opportunities for discussion and encouraged early policy change.

http://www.lse.ac.uk/GranthamInstitute/publication/the-economics-of-climate-change-the-stern-review/
http://news.bbc.co.uk/2/shared/bsp/hi/pdfs/30_10_06_exec_sum.pdf
https://en.wikipedia.org/wiki/Stern_Review
 https://www.climatecentral.org/news/climate-economists-stern-review-20827
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“Doughnut Economics”: A Sustainable Economic Model

10/2/2020

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By Hebe Larkin
Picture
Throughout the 20th century, economic growth was the ultimate goal of all financial markets. For companies, growth meant profit. For people, the availability of more things, the push of a competitive market to innovate, and a rise in wages as a result of this competition inevitably lead to an increase in living standards. In the 1950s, capitalist America became aspirational, and economic growth was viewed as a means of increasing quality of life. Nowadays, major corporations (with some of the world’s largest polluters among them) seize on this argument to counteract a push for Corporate Social Responsibility (CSR) policies. Redirecting money to protect the environment is incompatible with social justice, they argue; for it reroutes money which will trickle down directed to the poor for environmental protection. Growth is the only model under which social justice is achievable.
​
But growth is inherently unsustainable. It requires the use of resources at an ever-increasing rate; but our current rate of consumption is already unsustainable. Furthermore, with the global ‘middle class’ expected to grow from 2bn consumers in 2012 to nearly 5bn by 2030, resource use is only going to increase – and accelerate. So there is a problem, it seems, at the heart of our socio-economic system: we cannot have a socially just world, if we have an environmentally sustainable one, and vice versa.
 
Yet Oxford economist Kate Raworth has posited a solution to this, requiring a complete re-conception of our current economic model: she calls it ‘Doughnut Economics’. First introduced in a report she authored for Oxfam in 2012, and later the subject of her 2017 book Doughnut Economics, Raworth’s model provides a framework for an economic system under which the world is both socially just, and environmentally sustainable. So exactly how does it work?
 
The model is reasonably simple, consisting of the ‘social justice line’ – the lower limits below which, a society that is socially just, cannot fall– and ‘planetary boundaries’ –the limits beyond which we endanger the earth’s ecosystem.
 
The ‘Social Justice Line’ is comprised of the following categories as follows:
 
  1. Food security
  2. Adequate income
  3. Clean water & good sanitation
  4. Effective healthcare, access to education
  5. Decent work
  6. Modern energy services
  7. Resilience to shocks
  8. Gender equality
  9. Social equality
  10. A voice in democratic politics
 
The ‘Planetary Boundaries’ are the following (N.B. as it stands we have already exceeded the first four boundaries and are dangerously close to reaching many others):
 
  1. Climate change
  2. Biodiversity loss
  3. Nitrogen & phosphate use
  4. Changes in land use
  5. Ozone depletion
  6. Ocean acidification
  7. Freshwater use
  8. Particles in the atmosphere
  9. Chemical pollution
 
But how can this model be viable, if it is at odds with received opinion? The fact of the matter is, it’s not the needs of the poor that is putting strain on the planet: it is the demands of the rich. 
 
As the Oxfam report states: providing the additional calories needed by the 13% of the world’s population that currently face food insecurity and facing hunger would require just 1% of current global food supply; bringing electricity to the 19% of the world’s population who currently lack it is achievable with less than a 1% increase in global CO2 emissions; ending poverty for the 21% of the world’s population who live on less than $1.25 a day would require just 0.2% of global income. 
 
By contrast, a mere 11% of the global population generate around 50% of global carbon emissions; the richest 10% of people hold 57% of global income, the poorest 20% just 2%; high-income countries, home to 16% of the world’s population, account for 64% of world’s spending on consumer products and use 57% of the world’s electricity. 
 
So achieving social equality requires little increase in resource use – it instead requires a redistribution of existing resources and a balancing of consumption. Indeed, environmental stress can exacerbate poverty (by limiting people’s access to food security, health, safe water & sanitation, among other things), and vice versa (by forcing people to use resources in inefficient ways to meet their needs) - so it is not as simple a dichotomy as it may be made out to be.
 
What is required, then, is a series of policies enacted with serious consideration of both sides of the coin, that take into account social and environmental factors. Policies which purely focus on one of these factors risk endangering the other. For example, subsidising fertilisers to increase food production and reduce prices can often encourage farmers to use excessive amounts of fertiliser. This brings marginal improvements in crop yields and simultaneously harms the environment when nitrogen makes its way into the water system. 
 
A more effective means of approaching this issue would be to tackle food waste, reducing the demand for an increase in crop yield – for on average, 1.3bn tonnes of food (1/3 of the world’s food supply) is wasted each year. This is achievable by improving harvest techniques, storage facilities and processing in developing countries, and increases farmer’s incomes while reducing land, water, fertiliser use and carbon emissions.

So we shouldn’t cling to growth as the financial model. Raworth’s doughnut provides an economically viable, socially just and environmentally friendly means of rethinking approaching our current economic system.


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