Climate Change Momentum Now Undeniable

After many false starts, we believe that we have now reached a tipping point (or, if you prefer, an "inflection point").

We expect that the 21st session of the Conference of the Parties to the UNFCCC (COP 21) will in December 2015 ratify a real climate change deal. The final deal that will be reached in Paris is not itself the harbinger of change, it is merely the final stamp of approval on a broad global consensus that has now emerged that change must happen. Indeed, we would go so far as to argue that, regardless of the outcome of COP 21, the combination of investor and public awareness and concern has made genuine progress on the ground virtually inevitable.

In our view, Pope Francis' recently issued Encyclical, "On Care For Our Common Home" is a significant development, not simply because the Vatican has made the moral case to address climate change, but because of the depth and quality of the arguments contained in the document's 40,000 words. From media reports it is clear that there was internal debate within the Vatican, but the clear authority with which Pope Francis has addressed theological issues together with science and a deep understanding of society, politics and the global economy, makes this an extraordinary document that should be read by anyone with an interest in addressing climate change - regardless of their religious views.

The Encyclical is broad ranging, covering topics including inequality, pollution and poverty and is likely to be quoted for years to come. Identifying the climate as a common good, belonging to all and meant for all, the Encyclical also firmly identifies climate change as an issue of social justice, stating "we have to realize that a true ecological approach always becomes a social approach; it must integrate questions of justice in debates on the environment, so as to hear both the cry of the earth and the cry of the poor".

The Encyclical refers to the 1992 Earth Summit in Rio de Janeiro, stating that "it enshrined international cooperation to care for the ecosystem of the entire earth, the obligation of those who cause pollution to assume its costs, and the duty to assess the environmental impact of given projects and works. The Summit clearly set the goal of limiting greenhouse gas concentrations in the atmosphere, in an effort to reverse the trend of global warming. It also drew up an agenda with an action plan and a convention on biodiversity, and stated principles regarding forests. Although the Summit was a real step forward, and prophetic for its time, its accords have been poorly implemented, due to the lack of suitable mechanisms for oversight, periodic review and penalties in cases of non-compliance. The principles which it proclaimed still await an efficient and flexible means of practical implementation".

As a senior adviser to the Secretary General of the U.N. Earth Summit, I recall the sense of optimism coming out of the conference. Over the years, however, we have faced knockback after knockback. But the sense of purpose that brought 172 governments, 108 heads of state and 17,000 participants together has not dissipated but only strengthened over time.

Equally if not even more important, awareness in the private sector among both corporates and investors has increased exponentially.

Exhibit A: the joint letter from the CEOs of several of the world's leading oil and gas companies (sadly, none from North America), forcefully urging the heads of state to agree on a price for carbon at COP '21. Turkeys voting for an early Christmas? We think not. Rather, we see it as simply a group of far-sighted CEOs who have grasped the zeitgeist and its irreversibility, and are trying to position their companies competitively, and on the right side of history.

Exhibit B? The literally trillions in investor assets supporting organizations such as the Institutional Investors Group on Climate Change in Europe ---which alone brings together $10 trillion. And this does not include similar investor organizations in North America, Australia, and elsewhere.

Exhibit C? The Climate Bonds Initiative, a collective, collaborative effort which has helped propel the issuance of green bonds to a 300% increase over the past two years.

In making the call that we believe that we have reached a tipping point, we do not expect that opposition to change will disappear overnight; that would be naïve, and besides, Fox News is still on the air! But the opposition forces, which are significant, cannot fight the tide of momentum which we believe has now swung decisively and permanently against them.

The key indicator of change is the flow of capital. After many difficult years of development, renewable energy and clean technology are now frequently cost-competitive with fossil fuels and are attracting significant investment. In each of the sectors that we analyse, we are seeing examples of innovations being implemented by businesses that are focused on future profitability. In the mining sector, for instance, we are seeing companies implementing solar power as a stable source of power compared to diesel fuel. Climate considerations have already started to affect asset allocation and security selection for some of the largest institutional investors in the world.

The increased recognition that climate change is a material business factor is also being reinforced by activists such as the Asset Owners Disclosure Project, who have professionalised their activities to focus on laggards. Social media is providing activists with the ability to connect and collaborate to an extent that we have never seen before. Whilst the internet has now been with us for a while, it has been the smart phone that has revolutionised transparency by providing 24/7 access to internet to billions of people.

Having been at the forefront of sustainability investment for the last twenty years, we are positive about the potential for capital markets to be transformed over the coming decade. But how will change take place?

The words of Nassim Nicholas Taleb are worth recalling. In The Black Swan, Taleb states "history and societies do not crawl. They make jumps. They go from fracture to facture, with a few vibrations in between". We may be at such a fracture point. We say: bring it on.