Latest Articles by James Cameron

Carbon awareness and accountability

James Cameron, Sam Geall — Fri, 10 Nov 2006 12:06:00 +0000

The Carbon Disclosure Project aims to encourage the world’s biggest companies to reveal their greenhouse-gas emissions. The project’s chair, James Cameron, tells Sam Geall about its development and the role Chinese companies can play.

The Carbon Disclosure Project was launched six years ago, with the support of the British government, as an innovative device to encourage the world’s biggest companies to disclose their greenhouse gas emissions. In 2006, the project was undertaken for the fourth time. Over two hundred institutional investors, with assets of US$31.5 trillion under management, signed a single global request for disclosure of information on their greenhouse gas emissions to 2180 companies, including the FT500 largest companies in the world.

Sam Geall: Briefly, what are the goals of the Carbon Disclosure Project?

James Cameron: The Carbon Disclosure Project is a philanthropic initiative, to construct a dialogue between the institutionary investor community and large publicly listed corporations on the subject of climate change.

SG: You have now published the responses to the fourth Carbon Disclosure Project. How has the project developed since it first launched?

JC: It has developed rather remarkably. Year on year, a larger number of investor companies have signed the letter, a larger number of companies have received and responded to the letter, and there has been a significant increase in the amount of money that makes the request through the Carbon Disclosure Project letter.

The quality of the responses has also improved. So there is a quantitative and qualitative improvement year on year. Now we have 225 institutions asking in the order of 2000 companies what they understand by climate risk to their business and what they are doing about it. That constitutes US$31.5 trillion under management – a significant proportion of the global emissions of greenhouse gases. It really does matter. Some significant scale has been achieved in four years of the process.

SG: The project seems to have been very effective at raising awareness of companies’ carbon emissions. How much do you see this translating into action by companies and investors?

JC: I think it would be immodest and unrealistic to expect four years of awareness-raising to translate into a significant shift in the way either investor company assets or corporate assets are directed. However, the gap between awareness and action has been highlighted this year. In every presentation event and every launch event that we’ve held, that issue has come up and has been a question in the audience’s mind, and the message has been received and understood on both sides of the dialogue.

I don’t want to exaggerate this, because the first steps have been very modest indeed, and they match modest steps that governments have made to alter the conditions for investment in ways that favour the reduction of greenhouse gases. But we do now have, at last, a carbon market. It’s in its infancy, but it’s real. It enables a price for carbon to be established and it enables investors to invest in that marketplace. Every single penny that they invest reduces greenhouse-gas emissions, which therefore reduces risk to them, across the whole of the portfolio.

Putting on my other hat [as vice chairman of] Climate Change Capital, having just raised in the order of a billion dollars for a specialist carbon fund (which has attracted investment out of those big institutional investors who are Carbon Disclosure Project-signatories) is very significant for the carbon market. But not compared to the amount of money that’s flowing in a direction which increases risk.

SG: What was the response to the Carbon Disclosure Project from Chinese companies?

JC: The response was mixed. For instance, Sun Hung Kai Properties, a Hong Kong-based real-estate management and development group, was one of the companies that failed to respond at all, despite the fact that 48.89% of the total common shares is held by the Carbon Disclosure Project 4 signatories. That is to say, virtually half of the stock of the company is owned by the people asking for the response, but they didn’t respond. You can’t make out any case that real-estate management and development is unaffected by climate change.

However, if we look at Asia as a whole, the responses are pretty good. But it’s in its early stages. There are 39 companies that were contacted in Asia – 11 made no response, 12 declined, three provided information and 13 answered the questionnaire. So, 16 out of 39 provided something useful, which is not nearly as high as Europe, for example.

SG: It seems important than Chinese companies join in the project further.

JC: It’s absolutely crucial that the global nature of the problem is reflected in the global nature of the response. We live in a global investment market, with China increasingly attracting investment from overseas, and indeed investing itself overseas, building businesses that cross out of domestic markets.

SG: How do you think Chinese companies can be encouraged to participate?

JC: I think it’s to do with establishing credibility among institutional investors that they are aware of contemporary issues that matter in the world at large. I don’t claim that if you’re investing in China and you’re looking for returns in the emerging market as it is, that climate change is the top of your list of important criteria. But these big institutional investors – who command a very substantial proportion of the total amount of assets in the world that are available for investment, including investment in China -- have identified [climate change] as a key concern. China is increasingly associated with both the problem of climate change and the potential solutions to climate change.

So it makes absolute sense that the Chinese corporate world as well as the Chinese investment institutions act like everybody else and understand how to factor in climate risk to their businesses, learn how to mitigate the risk, learn how to invest and find opportunity – that they learn how to invest to avoid loss.

SG: How do you see the future of the project?

JC: I think it’s got some good momentum now. The Carbon Disclosure Project will work with other disclosure initiatives to make sure that we improve the quality of the data that we all get, that the data is comparable, that accounting standards develop so that one can compare properly the performance of businesses. If an investor is really committed to altering the way they invest, they need good metrics that they can rely upon. There’s still a lot of work to do there.

But looking ahead, I think maintaining consistency over disclosure will lead to more active engagement by the investment community in the policy realm, because they will be increasingly at risk unless governments intervene to establish and maintain the price of carbon – and possibly more intervention by regulators to ensure that the market is kept consistently informed about companies’ actions that increase systemic risk to the marketplace. So, I think maintaining this simple device will lead to increased effort in the policy-making realm and increased effort in the regulatory realm, both of which will make it easier for investors alter the way they allocate their capital.

James Cameron is the chair of the Carbon Disclosure Project and the vice chairman of Climate Change Capital, an investment banking group specialising in commercial opportunities created by a low-carbon economy.

Sam Geall is assistant editor of chinadialogue.

Homepage photo by Gareth Davies

Catalysing capital (1)

David Blood, James Cameron — Sun, 19 Apr 2009 07:27:00 +0000

The low-carbon economy will need a major shift in global investment flows, from economic activities which promote emissions growth to those which limit emissions, write David Blood and James Cameron.

[This article first appeared as a paper in the Copenhagen Climate Council Thought Leadership Series. It is reproduced here with permission.]

Capitalism is at a crucial juncture. The sustainability challenges we face – the climate crisis, water scarcity, extreme poverty, shifting demographics – are unprecedented and require an urgent response. Failure to address these challenges will put at risk our ability to create prosperity in the long term. The current state of the global economy compounds these challenges; in fact, the financial crisis has only underscored our conviction that sustainability will be a critical driver of economic and industrial change over the next 25 years.

In the case of the climate crisis, significant capital needs to be mobilized towards low-carbon solutions that span sectors and borders. This mobilization poses a tall yet manageable order as ours is not a problem of capital, but one of capital flow. The global community has the money, the policy insights, and many of the technologies needed to modify our emissions trajectory.

Fundamentally, the challenge ahead is about capital reallocation and timing: how do we steer capital away from high-carbon investments and channel them towards the low-carbon economy? And, above all, how do we mobilize this capital at the pace required to avoid dangerous climate change?

In the face of converging financial and environmental crises, the context for business most certainly has changed. We can capitalise on an opportunity to lay the foundation for a sustainable future, both financially and environmentally. Businesses are seeking new strategies to adapt to a new landscape of risk and opportunity. Governments are facilitating investments in low-carbon infrastructure to boost jobs and economic growth. Unthinkable only a few years ago, today the case for a green recovery of the economy continues to gain traction around the world.

The stimulus package in the United States, for instance, incorporates provisions seeking to deploy capital toward low-carbon assets. The business community is lining up to call for a consistent price signal on carbon to help guide long-term investments. Around the world, governments have already allocated billions in fiscal stimulus to climate-related investments. These commitments are just the first instalment in what could ultimately be a long-term government policy to use low-carbon growth as a key lever for economic recovery.

The financial industry is also adjusting to a new reality. Investors are recalibrating their risk and reward expectations; investment committees, boards of directors and shareholders are adjusting their concept of how to secure sustainable returns. Investors are finding longer-term horizons and investments in tangible low-emissions infrastructure more appealing than in past years.

There has never been a more appropriate time to return to fundamentals. Long-term investment strategies, in particular, will play a pivotal role in the transition to a low-carbon economy. So, how much capital will be needed to avoid dangerous climate change?

A manageable challenge

Investments towards a low-carbon economy must enable reductions in emissions of greenhouse gases sufficient to avert a catastrophic rise in global average temperatures. The investment decisions made in the next 10 years will play a critical role in defining our long-term emissions trajectory as the infrastructure we finance today will lock in technology for decades to come. We need to finance infrastructure that will allow atmospheric concentrations of CO2 equivalents to stabilize at the levels the scientific community deems safe.

Many studies have provided clarity regarding the costs of action (and inaction) to avoid dangerous climate change. While these studies differ in the specifics, their core message is consistent: addressing the climate crisis is technically feasible and the investment required is considerable but manageable.

The Stern Review, commissioned by the British government, estimated that the annual global investment needed to avoid the worst impacts of climate change could be limited to around 1% of global GDP each year if action starts now. By contrast, the report estimated the costs of inaction would be equivalent to losing at least 5% of global GDP each year. While scientific consensus since the Stern report was published has suggested that climate change is occurring faster than was anticipated at that time, the estimates by Stern remain a useful starting point in conceptualising the scale of this challenge.

According to McKinsey & Company, pursuit of the most economically rational emissions abatement opportunities would result in total upfront investment in addition to business-as-usual capital expenditures of €530 billion each year in 2020 and €810 billion each year in 2030. This sum corresponds to 5% to 6% of business-as-usual investments in fixed assets in each respective year. In addition, much of this investment could be recovered through future energy savings, bringing the total investment to €200-350 billion annually by 2030, less than 1% of forecasted global GDP in 2030.

According to the United Nations Framework Convention on Climate Change (UNFCCC), tackling climate change in the next quarter century will require "major changes to patterns of investment and financial flows." The UN study estimated that US$200-210 billion worth of additional investment and financial flows would be necessary to return greenhouse-gas emissions to current levels.

Other studies have estimated the investment needs in specific sectors: the International Energy Agency estimates that additional investments in energy infrastructure equal to 0.6% of global GDP in 2030 are needed to maintain a 450 parts-per-million (ppm) concentration. New Energy Finance and the World Economic Forum estimate that at least US$515 billion needs to be invested annually in clean energy over an extended period to keep carbon emissions from reaching a level deemed unsustainable by scientists."

According to the Eliasch Review on financing global forests, commissioned by the British government, the finance required to halve emissions from the forest sector to 2030 could be around US$17-33 billion per year. In the very short term, 40 forest nations will need roughly US$4 billion to fund capacity building efforts over five years.

These studies provide further insight into why the challenge ahead is manageable. If we are able to capture all costs-savings accruing from abatement measures, many investments could produce net benefits: in many cases, the up-front capital investment could be recovered over time thanks to energy savings. According to McKinsey, approximately 11 of the 38 gigatonnes of abatement opportunity in 2030 could have a net economic benefit by enabling the savings in the future to outweigh their upfront investment.

Another key insight from research to date is that the vast majority of abatement will need to occur in emerging economies. Therefore, a core challenge ahead will be to tackle the barriers to investments in these countries.

Numerous studies have also shed light on the need for prioritising policy tools. Since most global greenhouse-gas emissions are energy-related (power plants, buildings, transport and industry), much of the required capital will have to flow into energy solutions – both towards de-carbonising the supply of energy and reducing demand. These solutions require urgent attention as many of these technologies (such as stricter building codes and fuel efficiency standards) are readily available, yet need public policy support to provide the long-term framework investors require.
New capital and financial flows are also needed to limit the destruction of critical carbon sinks, particularly since land-use changes account for roughly 20% or more of global greenhouse-gas emissions.

Some of the barriers to low-carbon investing are behavioural and sector-specific, such as addressing the agency problems that property owners face to make building efficiency investments. For example, building owners lack the incentives to make the upfront payments to retrofit buildings because the benefits, in the form of energy savings, accrue to tenants and not to them.

In other cases, barriers are institutional: almost all of the investment needed to tackle deforestation will have to be deployed in emerging economies that may lack appropriate institutional infrastructure to make investors feel sufficiently comfortable. Many governments, NGOs, and multilateral agencies, along with private investors, are working proactively to address the needed infrastructure, monitoring, and compliance to ensure national emissions reductions. Globally, the efforts to address deforestation must be scaled dramatically.

NEXT: How can we make the shift?

David Blood is senior partner and co-founder at Generation Investment Management LLP.

James Cameron is vice-chairman and co-founder at Climate Change Capital Ltd.

[This article first appeared as a paper in the Copenhagen Climate Council Thought Leadership Series. It is reproduced here with permission.]

Homepage photo by Swisscan

Catalysing capital (2)

David Blood, James Cameron — Sun, 19 Apr 2009 07:22:00 +0000

Which tools can we use to help shift capital allocation patterns to clean industries? David Blood and James Cameron conclude their two-part assessment of the low-carbon recovery.

[This article first appeared as a paper in the Copenhagen Climate Council Thought Leadership Series. It is reproduced here with permission.]

Dealing with systemic climatic risks will require systemic shifts in capital allocation. Given the technologies we currently have and the need to act swiftly, what tools will enable this shift in allocation patterns? Because risk-reward expectations drive investors to deploy capital toward some assets but not others, we need to lower the risk associated with low-carbon solutions to make them attractive to investors. Investors must recognise that carbon assets, not just sub-prime mortgages, are toxic.

We need new approaches to manage systemic risks that build upon three core principles:

• Long-term perspective
• Good governance and transparency
• Cooperation

Solid adherence to these principles over time will need to coexist with adaptive flexibility in the implementation of the ideas suggested below.

Principle one: long-term perspective

Most investors and governments face limited incentives to use the long-term as their compass for decision-making. Investment performance is judged and rewarded based on quarterly results while governments can be defeated if they are deemed not to have delivered within a short time horizon. Encouragingly, there is a growing movement against short-termism; the current financial crisis is a dramatic example of what can happen when it goes unchecked.

To deploy capital at the scale required, investors will need policy signals that are long, loud and legal: long-term oriented, clearly defined, and written into law. Establishing de-carbonisation mandates along a pre-defined and long-term horizon is the most critical enabler of low-carbon investing. With such mandates in place, policy uncertainty will no longer erode the returns and valuation of these assets. Governments need to implement a regulatory framework that will provide a solid foundation for investors.

In the absence of long-term credible policy signals including a price on carbon, low-carbon investments will fail to reach the scale needed. The global market for carbon credits – dominated by the EU Emission Trading Scheme (EU-ETS) and Clean Development Mechanism markets – has grown steadily in size in recent years to a value of US$110 billion in 2008. Although this market has succeeded in establishing a market-driven price for carbon, this price signal has proven insufficient to catalyse low-carbon investment on the scale that policymakers expected and investors require.

The uncertainty about the post-2012 climate regime has created volatile price signals that have failed to guide long-term investment decisions. The price signal from the EU-ETS, for example, has not resulted in fundamental changes to the energy footprint of participating European utilities. In the future, the market is expected to provide reliable guidance to the private sector as it grows to include new parts of the world – the United States, China, India, and Brazil in particular – and larger parts of the global economy such as aviation and forestry. In the meantime, we need a broader set of catalysts to unlock investments in low-carbon solutions at the scale and pace required.

Because the de-carbonisation of infrastructure is at the centre of the climate crisis, new financial products and strategies are needed to encourage pension funds and retail investors to invest in climate solutions. Governments could help develop funding schemes modelled upon the "war bond" philosophy – using savings bonds to help fund a collective effort against a common adversary. For example, "climate bonds" could be state-backed debt instruments with ring-fenced proceeds going directly into green infrastructure projects. Products like these could raise money from retail investors and pension funds and would guarantee that the proceeds go to climate solutions.

The need for modern grid infrastructure in the United States and EU illustrates where private capital must be mobilised alongside government infrastructure spending. New "smart grid" infrastructure could cost up to $400 billion over 10 years in the US alone. Government expenditure and green stimulus will likely help mobilise private investment through the multiplier effects that government expenditures have on the wider economy.

In addition to new products, momentum is building to create a specialised facility geared toward long-term investments in low-carbon infrastructure, offering loan guarantees, lines of credit, equity investments and insurance. This idea is gaining support in the US, where the 2009 federal stimulus package included billions to support loan guarantees for renewable energy and electrical transmission technologies.

Finally, at the household level, many of the investments in energy efficiency for buildings involve investment decisions by millions of homeowners, creating a need for new financing strategies for individuals. In particular, large-scale deployment of "green mortgages" could provide household loans to help finance the additional upfront capital required to enhance the energy efficiency of a house, enabling homeowners to pay over time with the energy savings that accrue in the years which follow.

Principle two: good governance and transparency

The implementation of measures to price externalities, such as CO2 emissions, requires strong institutions. The specialised agencies at the core of the global economy – including the World Trade Organization, International Monetary Fund, and World Bank – arose from the efforts of governments in the post-World War II era to develop the institutional architecture required to facilitate global trade, financial stability and economic development.

Today, the joint financial and climate crises underscore the need for a similar multinational effort to revise and update this institutional architecture. The global economy has indeed entered a post-Bretton Woods era, and we must now reform our international institutions for trade, finance and development – first envisioned over 60 years ago – in order to address today's financial and environmental challenges and respond to the linkages between these two spheres.

Climate governance at the global level calls for new institutional arrangements. Several global mechanisms have been proposed ranging from a global carbon fund to a global trust for ecosystems and forestry. These proposals have different emphases but share a philosophy: long-term orientation, multilateralism and protection of the "global commons."

Good governance and transparency are mutually reinforcing. We will need to increase non-financial disclosures to further shift capital allocation away from carbon-intensive assets. Greater disclosure of climate risks will allow investors to uncover hidden climate risks and opportunities in their portfolios. Possible ways to mandate stricter listing requirements of climate-risk disclosure among public companies as well as requirements for better disclosure, both qualitative and quantitative, of climate risks in annual financial reports also merit further exploration.

A concerted effort to gauge and manage carbon data around the world needs to complement a global institutional anchor for climate finance. Carbon analysis should no longer rely on data collected for other purposes (e.g. fossil fuel consumption or transport data). Just as labour and financial flows are carefully and officially tracked around the world, carbon also needs its own centralised and international data management facility.

We need reliable emissions data that is as timely and relevant as the data investors already receive on GDP, non-farm payrolls, consumer price indexes, industrial production and house prices.

Global fund

To catalyse and scale up capital toward low-carbon solutions, a global fund could be created with the sole purpose of financing projects that protect the global commons. Such a facility would operate along the logic of a federal reserve, ensuring that we have enough liquidity to invest in carbon reduction – and that the economy does not deviate from a safe emissions trajectory. Funding would come from governments, and the agency would operate as a multilateral body. It would set rules and facilitate financial emission-reduction transactions, and could also provide "rescue packages" in critical situations.

Because forests are in particular danger and a key element of any solution, a global fund could provide financing to governments that seek to avoid deforestation. Forestry trusts or ecosystem endowments could be put in place that would allow host governments to sell forests to the global carbon fund in exchange for certain guarantees, and the fund could be a means of delivering foreign aid in exchange for the preservation of important carbon sinks.

The Catalyst Project, which aims to rapidly accelerate the world's response to climate change, has explored the creation of a "bank" to help boost the Clean Development Mechanism (CDM) under the Kyoto Protocol. Such a global system would require developed countries to buy credits at their market (marginal) cost from the "carbon bank," which would then use the proceeds to buy credits in developing countries at a price close to the incurred (average) costs. The carbon bank would use the proceeds from any difference between sale and purchase prices to enhance and fund domestic mitigation and/or adaptation efforts in developing countries, in a way similar to the current CDM levy.

Principle three: cooperation

In the coming years, we are unlikely to make progress in tackling climatic and financial risks without a significant increase in collaboration. The concurrent financial and environmental crises will likely demand a level of cooperation not seen since the Second World War. Given the existential threat we face, cooperation will be akin to self-preservation. The natural world offers examples of animals choosing to cooperate as a mechanism to survive. Communities of species that exhibit collaborative behaviour tend to outperform communities where competition is the only option.

In the past 20 years, we may have put too much emphasis on the benefits of competition and paid insufficient attention to the long-term benefits of cooperation; in the face of current problems, we need both. Competition enables the very innovation in technologies, products, and services that are critical for the transition to a low-carbon future, but it must be complemented by a collaborative philosophy.

For example, collaboration is necessary for the development of financing strategies that scale up the retrofitting of buildings. According to McKinsey & Company, many of these upfront investments could pay for themselves in about 10 years by delivering equivalent energy savings. The main obstacle to these investments being made, however, is a combination of the initial upfront payment, agent, and principal problems, and inertia.

To resolve these issues, some foundations and non-profits are working together with banks to offer solutions, including strategies that allow the owner of a building to implement a retrofit without disbursing the initial capital expenditure. Instead, the owner retains 100% of the energy cost savings from their projects. These savings can be used to repay loans used to finance home improvements or can be kept by the owner, depending on the scheme. Major multi-stakeholder collaborative efforts are also needed to implement strategies to de-carbonise at the city-level, which calls for joint efforts to define long-term planning directives that guide appropriate investments towards cleaner infrastructure.

Governments will also have to radically bolster the way they cooperate to ensure consistency and foster progress. Among those requiring coordination, few projects will demand more collaboration to successfully deploy capital than those tackling deforestation. Since land-use-related abatement opportunities are mostly in emerging economies, the challenge must command the engagement of those governments with the foreign reserves, sovereign wealth, and economic strength to offer assistance.

Many of the ecosystem services that forests provide are crucial for maintaining life and livelihoods: roughly 1.6 billion people depend on them for their welfare and income. To build trust, countries with the capacity to help will need to not only honour their own commitments to reduce emissions, but collaborate with those receiving assistance to achieve climate goals. A new platform for cooperation will require the use of performance-based criteria to build confidence that the projects are delivering expected reductions. Norway's collaborative approach with Brazil to combat deforestation illustrates this approach.

Cooperation is also critical because systemic changes in our geopolitical landscape are underway. We are moving toward a multi-polar context in which large emerging economies command a stronger voice in global affairs. In this new context, we need to creatively move beyond sterile technology-transfer prescriptions that fail to account for new realities. The breakdown of the world into "developed" and "developing" categories is quickly losing currency. A dynamic wealth creation process is occurring in large emerging economies and cooperation will be needed to continue building trust with these countries.

Much of this collaboration can be channelled toward creating stronger institutions in the emerging world that will allow more investment to flow into low-carbon infrastructure. Many of these countries will require new and larger infrastructure in the coming years and their technological choices will lock the world into a particular emissions trajectory in the future.

Finally, a successful approach to addressing the climate crisis will require innovation and collaboration to address other fundamental challenges facing our society, such as energy security, water scarcity, demographic changes, extreme poverty and disease. These challenges are deeply interrelated and will require joint action on many fronts to manage complexity and encourage synergetic solutions, such as infrastructure projects that incorporate climate change and water-related considerations, while simultaneously creating employment and economic prosperity.

David Blood is senior partner and co-founder at Generation Investment Management LLP

James Cameron is vice-chairman and co-founder at Climate Change Capital Ltd.

[This article first appeared as a paper in the Copenhagen Climate Council Thought Leadership Series. It is reproduced here with permission.]

Homepage photo by extranoise