Super  Fund  Investments  in  a  Climate  Change  World

Frank  MullerProfessorial  Visiting  Fellow

Institute  of  Environmental  Studies,  UNSW

Take  home  messages

• Take  long-­term  view  of  carbon  risk/opportunity

• Understand  major  economic  transformation  needed

• Recognise  as  fiduciary  duty,  not  just  social  responsibility

• Beware  of  short-­term  political  fixes  &  special  interests

• Expect  surprises  – don’t  count  on  change  being  gradual

A  major  economic  transformation

Periodically,  major  new  forces  dramatically  reshape  the  business  world  – as  globalization  and  the  information  technology  revolution  have  been  doing  for  the  past  several  decades.    Climate  change,  in  its  complexity  and  potential  impact,  may  rival  them  both.    While  many  companies  may  still  think  of  global  warming  as  a  corporate  responsibility  issue,  business  leaders  need  to  approach  it  in  the  same  hardheaded  manner  as  any  other  strategic  threat  or  opportunity.

Porter  &  ReinhardtHarvard  Business  Review,  Oct.  2007

Deep  emissions  cuts  are  needed

Ultimate  CO2Concentration

(ppm)

Global  Av.  Temp  Increase

(°C)

Peaking  Year  for  Global  

Emissions

Global  Emissions  Change  in  2050  (%  of  2000  level)

350-­400 2.0  -­ 2.4 2000  -­ 2015 -­85  to  -­50

400-­440 2.4  -­ 2.8 2000  -­ 2020 -­60  to  -­30

440-­485 2.8  – 3.2 2010  -­ 2030 -­30  to  +5

Source:    IPCC  4th  Assessment  Report,  WGIII

Cutting  emissions  won’t  break  the  bank

CO2-­e  Level

(ppm)

2030  GDP  reduction

2050  GDP  reduction

Reduction  in  average  annual  GDP  growth  rate

590  – 710 -­0.6  to  1.2 -­1  to  2 <0.06

535  – 590 0.2  to  2.5 Slightly  –ve  to  4 <0.1

445  – 535 <3 <5.5 <0.12

Note:  GDP  loss  is  relative  to  baseline  and  assumes  least-­cost  trajectory

Source:    IPCC  4th  Assessment  Report,  WGIII

Be  prepared  for  nasty  surprises

Source: UN Foundation & Sigma Xi

Australia’s  Greenhouse  Emissions,  2005

Waste3%

Agriculture16%

Land Clearning & Forestry

6%

Electricity Generation

35%

Transport14%

Fugitive6%

Other Stationary Energy

15%

Industrial Processes5%

Data  Source:    Australian  Greenhouse   Office

Energy

70%

Per-capita Emissions, 2000

0 5 10 15 20 25 30

India

China

Indonesia

EU  25

Japan

Australia

USA

Note: Covers all GHGs, including land use change (tonnes CO2-e/person)

Source: World Resources Institute

“...firms can actually benefit from properly crafted environmental regulations that are more stringent (or are imposed earlier) than those faced by their competitors in other countries. By stimulating innovation, strict environmental regulations can actually enhance competitiveness.”

M.E. Porter & C. van der Linde

Renewables:  Growing  Capacity  è Declining  Costs

Global  Average  Capacity  Growth

2000-­2004

Costc/kWh

(USD)

Cost  Trends  (cost  reduction  per  doubling  of  capacity)

On-­shore

Wind

28%  p.a.  é 4-­6 12-­18%    ê

Grid-­connected

Solar  PV

60%  p.a.  é 20-­40 20%  ê

Source:    Renewables  2005:  Global  Status  Report  (www.ren21.net)

Energy  EfficiencyThe  largest,  cheapest  &  first  option

IPCC  WG3  

(May  07)

•…  often  more  cost-­effective  to  invest  in  end-­use  energy  efficiency  improvement  than  in  increasing  energy  supply  …

•By  2030,  about  30%  of  the  projected  GHG  emissions  in  the  building  sector  can  be  avoided  with  net  economic  benefit

McKinsey  Global  Inst.

(May  07)

•By  capturing  the  potential  available  from  existing  technologies  with  an  internal  rate  of  return  (IRR)  of  10  percent  or  more,  we  could  cut  global  energy  demand  growth  by  half  or  more  over  the  next  15  years.

•Base  case  energy  demand  growth  of  2.2%  p.a.  -­-­ can  be  cut  to  less  than  1%,  without  compromising  economic  growth.

•While  market  forces  alone  will  not  lead  to  this  outcome,  targeted  policies  can  overcome  the  policy  distortions  and  market  imperfections  that  are  currently  acting  as  barriers  …

Intl.  Energy  Agency

(2006)

•In  many  countries,  new  buildings  could  be  made  70%  more  efficient  than  existing  buildings.  Some  of  the  exciting  new  technologies  that  can  contribute  to  this  transformation  have  not  yet  been  commmercialised,  but  most  have.

•In  industry  there  is  huge  potential  to  reduce  energy  demand  and  CO2  emissions…

Clean  Energy  OptionsBuildings  can  be  70%  more  efficient  

• Windows  – 3x  insulation  value

• Gas  furnaces  – 95%  efficient

• Air  conditioners  – 30-­40%  energy  cut  last  10  yrs

• Lighting  – cost-­effective  savings  up  to  60%

• Cut  standby  power  =  10%  home  electricity

• Efficient  refrigerators,  water  heaters,  washing  machines  &  dishwashers

• Smart  meters,  PVs,  micro  co-­generation,  district  heating,  heat  pumps,  etc

Source:  International  Energy  Agency

A  Clean  Energy  Scenario  for  AustraliaCO2 Emissions  from  Stationary  Energy,  1990-­2040

0

50

100

150

200

250

300

350

1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038

Mt/a  CO2  equiv.

Energy  Efficiency

Renewable  and  gas  fired  generation

Baseline  or  weak  efficiency

Baselinewith  mediumefficiency

Clean  EnergyFuture

50%  reductionin  CO2 emissions

Note: Time path is notional. Source: Saddler, Diesendorf & Dennis, 2004.

Clean  Electricity  Scenarios  for  Australia

Black Coal9% Natural Gas

17%

Oil1%

Hydro7%

Biomass27%

Wind20%

Solar4%

Cogeneration15% Black Coal

28%

Brown Coal6%

Natural Gas26%

Hydro7%Biomass

20%Wind11%

Solar2%

2040  with  50%  cut  from  1990Saddler,  et.  al.,  2004

2050  with  60%  cut  from  2000Aust.  Bus.  Roundtable   on  CCIncludes  CCS  for  fossil  fuels

Embodied  emissions  for  home  construction

0

2

4

6

8

10

12

14

Floor  structure Floor  covering Wall  frame Roof  frame Windows

tonnes  CO2-­e

Concrete Steel Cermaic  tiles Brick Aluminium Timber

Source:  Forest  &  Wood  Products  R&D  Corp  &  CRC  for  Greenhouse  Accounting

Don’t  mask  price  signals  with  special  deals

Social  responsibility  or  fiduciary  duty?

• Universal  ownership frames  fiduciary  duty– Comprehensive  view  of  whole  portfolio– Externalities  matter  (+ve  and  –ve)

• Long-­term  investment  liability  matches  time  horizon  of  climate  change  risks  &  opportunities

• Broad  membership  – interests  of  many,  not  few• Low-­cost  institutions  – understand  need  for  policy  frameworks  that  minimise  skimming

Practical  steps  for  super  funds

• Support  reporting,  rating  &  indexing  initiatives

• Factor  carbon  price  into  investment  decisions

• Act  now  on  energy  efficiency  of  property  holdings

• Invest  in  clean  energy,  sustainable  infrastructure,  etc.

• Engage  with  companies  and  vote  proxies  for  reasonable  shareholder  proposals

• Engage  on  public  policy  to  counter  special  interests  &  short  termism– effective  &  fair  emissions  trading– energy  efficiency  priority

– sustainable  infrastructure  (public  transport,  rail  freight)

Take  home  messages

• Take  long-­term  view  of  carbon  risk/opportunity

• Understand  major  economic  transformation  needed

• Recognise  as  fiduciary  duty,  not  just  social  responsibility

• Beware  of  short-­term  political  fixes  &  special  interests

• Expect  surprises  – don’t  count  on  change  being  gradual