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The Actuary The magazine of the Institute & Faculty of Actuaries
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Soapbox: Placing bets on the future

While shorter-term political events usually dominate the daily news, climate change continues to demand attention near the top of the global political agenda. Governments worldwide realise its urgency. As a result, ambitious greenhouse gas reduction targets are being set. Huge amounts of investment required to meet these targets are being outlined. These amounts are so vast, though necessary, that it is impossible that the public sector will be capable of financing the necessary projects and technology development. It has been estimated that 85% of the required investment will come from the private sector. In the context of the Stern Report’s calculation that 2% of global GDP will be required to avoid runaway climate change, the private sector will need to contribute over $1 trillion annually.

Pension funds, increasingly looking for newer more stable forms of long-term investment, can significantly contribute to the required capital. Investments in infrastructure and energy projects could be the perfect solution. However, such investors require a long-term and stable policy framework, enabling them to effectively identify risks and make informed decisions. According to recent surveys conducted by The EIC Environmental Investment Network (the EIN), many entrepreneurs and investors within the environmental sector consider the current UK policy landscape as not adequately conducive to the level of investment needed. This can easily be demonstrated by the inherent built-in risk of the UK’s political system, whereby the policy landscape can change dramatically with governments. For example, the recent introduction of feed-in-tariffs has been welcomed, and rightly so.

However, there is already uncertainty over their future, with the Conservatives indicating qualification changes could be made. Governments and opposition parties need to ensure that a consistent and stable climate change policy and regulatory framework is in place to incentivise entrepreneurs and investors to join the sector. Whatever its virtues, democracy is not good at delivering consistent long-term policy. The EIN’s role is to facilitate funding for innovative or growing environmental technologies, and this is challenging at the best of times. It needs the best possible context of consistent political support.

The theme of risk particularly affects developing countries, which are presently short of institutional investment as they are perceived to be politically and economically unstable. In many cases, the perceived risk is inflated, based on perpetuated stereotypes stemming from the past. The environmental sector, being a nascent sector generally, especially in many developing countries, thus tends to bear the brunt of this uncertainty. Yet those who are willing to take on this perceived risk have the potential to see large returns.

It is estimated that up to 65% of the required investment to prevent runaway climate change will need to be directed toward developing countries. Increasing energy demands, rapidly rising standards of living and new technological requirements will have severe consequences if business as usual is continued. Developing countries have the opportunity to develop without the resource-intensive growth associated with the development of the West, thereby leapfrogging old, dirty, inefficient technologies. Development of a path towards a low-carbon future will therefore depend on reassessment of risk and long-term thinking about resource and energy security concerns.

It is essential that risk is viewed in a manner that reflects the changing climate, which is especially important for long-term investments. How will rising temperatures or reduced food or water availability, for example, affect current assets or investments, or even the private sector economy as a whole?

As the science of climate change is essentially certain, it is in investors’ interest to ensure that investment includes climate change mitigation and adaptation. Consequently, the key to influencing the flow of investment into the sector will rely on creating a clearer relationship between our environment and its associated value to the wider economy. The risk paradigm is shifting as stakeholders begin to realise that long-term value is likely to depend on sustainability, and where not addressing climate change becomes the risky option. The next decade is likely to see such a shift of thinking that existing criteria for assessing risk will soon look very short-sighted. The sooner we all reassess true sustainability, the safer our bets on our global future will be.

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Michael Sippitt is chairman of Forbury Environmental Limited and co-chair of The EIC Environmental Investment Network