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Debate | Carbon and Cash

Environment flooding umbrella rain 01 070913

After three years of almost static growth in global CO2 emissions, 2017 showed a 1.4% rise – bringing emissions to a record high of 32.5 gigatonnes.

More carbon in the atmosphere means a more hostile climate, which in turn threatens vulnerable infrastructure. In the United States alone, the annual bill for repairs and recovery following climate-related disasters is estimated at around $300bn (£222bn).

Investors are increasingly aware that their money is at risk. Weeks before the Paris Agreement on carbon emissions reduction was signed in 2015, Bank of England governor Mark Carney outlined how the knock-on effects of climate change, including physical damage to assets and difficulties adjusting to a low-carbon economy, could create financial uncertainty by harming an asset’s value.

Better risk reporting

Carney also recommended better reporting of climate risks. “With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy,” he said at the time.

“The more we invest with foresight; the less we will regret in hindsight.”

The financial industry sat up and listened. In 2016 the G20’s Financial Stability Board (FSB) set up the Taskforce on Climate-related Financial Disclosure (TCFD). It aims for voluntary, but consistent, disclosures of climate-related risks to help investors, insurers and others to make more informed decisions.

Using investor power

More than 230 organisations have signed up to the TCFD code. Although it is primarily designed to encourage investors to make climate-conscious decisions, in the long run it means capital will start flowing away from firms which are not contributing to the Paris Agreement’s aim of keeping temperature rises below 2°C.

Infrastructure companies will be particularly affected and water companies are leading the charge.

Anglian Water is already trying to align with the requirements of the TCFD by reducing the carbon used in building its assets by 70% by 2030, from a 2010 baseline. Looking ahead, it wants to be carbon neutral in its operations by 2050.

Anglian water head of carbon and energy david riley crop

Anglian water head of carbon and energy david riley crop

Riley: Cutting emissions is a way of cutting costs

“Reducing carbon emissions reduces costs; it’s about business efficiency,” explains Anglian Water head of carbon and energy David Riley.

“There is a line of sight to customers at the end of this, that we are making the right decisions, operating the business in the right way.”

 The government’s 2013 Infrastructure Carbon Review showed the infrastructure sector has full control of 16% of total UK carbon-based emissions and influence over a further 37%.

If firms do not show how they are contributing to climate change mitigation, as well as adaptation, investors will turn elsewhere says Aviva Investors head of infrastructure debt Darryl Murphy.

“They [large corporations] are going to find increasingly that if they’re not open and they’re not actually addressing these matters, institutional shareholders are going to act with their feet, in terms of not investing,” he says.

Aviva investors head of infrastructure debt darryl murphy crop

Aviva investors head of infrastructure debt darryl murphy crop

Murphy: Investors will reject climate contributors

Murphy believes climate-related risk reporting will become increasingly important to investors, adding that companies which comply will make themselves more attractive.

Pensions Infrastructure Platform chief executive Mike Weston feels similarly about pension fund managers. “We’re not driving the change as such. What we are trying to do is to maintain the momentum and make sure that the investing pension schemes can get access to the sorts of investment that they want,” he says.

It in effect forces companies to go through the process of understanding their risks and qualifying their exposure

“We don’t want people to retire and take their pension, and not be able to live anywhere because we’ve destroyed the world.”

At the moment, reporting climate-related risks is voluntary, although the European Union high level expert group on sustainable finance has recently recommended mandatory reporting from businesses in the European Union. For Standard & Poors Global Ratings director Miroslav Petkov, the fact that those risks will be reported at all is beneficial.

“It’s going to take time to be really useful and insightful about exposure [to risk], but the other benefit is it in effect forces companies to go through the process of understanding their risks and qualifying their exposure. And this in itself is helpful,” he says.

As Mott MacDonald global head of climate resilience Ian Allison explains, the TCFD will help firms understand what actions they must take.

We will not be able to fund adaptation, unless we can account for those risks somewhere in our economy

“We won’t be able to fund resilience, particularly we will not be able to fund adaptation, unless we can account for those risks somewhere in our economy. And if we’re going to account for those, we’re going to have to disclose the risk: hence the importance of the TCFD,” says Allison.

“We have to take the disclosure and we have to act on it to lessen the risks we are dealing with.”

Anglian Water also understands that its assets must be resilient to climate change to protect customers, but the risks are different in different areas; a coastal asset will face challenges which might not affect an inland asset.

Riley explains how the firm is planning for the future, building resilience into its assets so they will still be reliable in 2025 and 2065.

“If we look at those different time periods, it not only gives certainty in decision-making, it gives certainty to our supply chain so we can respond in the most appropriate way,” he says, adding that although the forecasts might not be correct, taking action now is still incredibly important.

Reducing carbon emissions reduces costs; it’s about business efficiency

“Those changes in the climate around our region is something that we are responding to, and understanding how those changes are going to occur, when they are going to occur, means that we can put that plan in place as we are investing in our totex investment process right now.”

But it seems the public and private sectors are experiencing different levels of pressure to report climate risks. As Network Rail weather resilience and climate change adaptation strategy manager Lisa Constable explains, the way it and private investors identify risks is very different.

Network Rail sees risk varying from asset to asset, for example the risks posed to train services of floods and signal failures on a train timetable. An investor on the other hand would see risk in financial terms.

Network rail weather resilience and climate change adaptation strategy manager lisa constable crop

Network rail weather resilience and climate change adaptation strategy manager lisa constable crop

Constable: public and private sectors differ

Constable says that as a public sector organisation, Network Rail does not currently experience much pressure to report climate risks.

“We are part of the carbon reduction commitment and we produce an annual return which has got various metrics on sustainability, but we’ve got no pressure from investors or others to report,” she says. “Our focus is on safety and performance. It’s not as much on finance […] as it is in other companies.

“So that drives decision-making in a different way. We’re working really, really hard to get sustainability leadership driven through the business, to get people to understand what can be done and the importance of managing carbon and weather resilience, and managing it better, but the drivers are so different in the public and private sector companies.”

But as Allison says, whether public or private sector there are huge financial benefits to investing in resilience and considering climate-related risks. The TCFD will help encourage disclosure, which in turn will make it easier for companies to secure money for climate change resilience schemes.

“The disclosure and the accounting will make it individually easier for businesses, asset owners and, corporations so that if they have to put on their balance sheet the risks of climate change, leveraging the money to decrease that risk should be an easier process.”


Debate participants

Ian Allison global head of climate resilience, Mott MacDonald

Madeleine Rawlins principal consultant, Mott MacDonald

Andrew Mylius editorial manager, Mott MacDonald

Russell Dallas technical director, global practice leader – infrastructure finance, Mott MacDonald

Mark Hansford editor, New Civil Engineer

Keith Clarke chair, Forum for the Future

Keith Colquhoun climate change and sustainability strategy manager Thames Water

Lisa Constable weather resilience and climate change adaptation strategy manager, Network Rail

David Hirst managing director, Ainsty Risk Consulting

Emma Howard Boyd chair, Environment Agency

Katherine Ibbotson carbon manager, Environment Agency

Mark Lewis head of research, Carbon Tracker

Darryl Murphy head of infrastructure debt, Aviva Investors

Miroslav Petkov director, S&P Global Ratings

David Riley head of carbon and energy, Anglian Water

Geoffrey Smith managing director, ING

Mike Weston chief executive, Pensions Infrastructure Platform

Darren White head of environmental sustainability, Tideway

In association with

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