Reporting to Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, Nick will help develop and deliver Aviva Investors’ macro stewardship programme, with an emphasis on promoting the net zero transition at a sectoral level, as well as helping to identify and advocate for specific government policies that would drive a just transition, starting with hard-to-abate sectors such as energy, heavy industry, aviation and shipping. He will formally begin his new role in June.

Aviva Investors’ macro stewardship programme focuses on engagement with governments, policymakers and other key stakeholders to correct market failures on sustainability issues. It complements the asset manager’s corporate governance activities which relate to engagement at a corporate level and influencing the companies and physical assets the business invests in.

Nick joins from his previous role as Executive Director at the Aldersgate Group, a cross-economy membership organisation focused on accelerating the UK’s transition towards a competitive, resource efficient and net zero emissions economy. At the Aldersgate Group, Nick led the overall strategic direction, work programme and policy advocacy activities of the Group for the last eight years, covering all key areas of climate and environmental policy, as well as green finance.

Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, said: “Nick is a hugely respected figure on a broad range of sustainability issues, and I have long admired his work at the Aldersgate Group and before. He brings an unrivalled amount of expertise in this field. His experience of engaging with companies, financial institutions, regulators, governments and policymakers will be invaluable. I am greatly looking forward to working more closely with him and continuing to advance our macro stewardship programme, which has considerable potential to help power the transition towards a sustainable future.”

Nick Molho, Head of Climate Policy at Aviva Investors, said: “Aviva Investors is an organisation I hold in high regard, and one which has been taking material action to shape the transition towards a sustainable future from within the private sector by actively engaging with real economy businesses and financial institutions, as well as with global governments, regulators and standard setters. Such activity is critical in ensuring capital flows into the right activities in the global economy and leads to meaningful change. I look forward to using my knowledge and experience to build on Aviva Investors’ achievements to date and supporting its ongoing work in calling for a timely and successful transition to net zero emissions.”

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Steve Waygood

COP26 was billed as ‘the most important meeting in history. Chief Responsible Investment Officer at Aviva Investors, Steve Waygood had a front row seat and shares his thoughts on the climate conference.

As I boarded the train home from Glasgow, exhausted from the frenetic lead-up and then the exhilarating reality of being part of a once-in-a-generation – no, once-in-a-lifetime – opportunity to change the course of civilisation’s future, so many thoughts were spinning through my head.

It was – and still is – impossible to know if I and my equally committed Aviva colleagues achieved what we set out to from COP26. More importantly, it is also impossible to know if the whole conference will be judged a success. It is unlikely anyone will know for years yet, until clear signs of talk becoming action start to emerge.

The cynics and critics liken COP to Davos. They bemoan the great and the good turning up in jets to fuel their egos and self-importance. They worry that bluster and hot air will win out over concrete progress and action.

They are right to worry. Progress at previous meetings has been far short of what is required, which has increased the burden of the job at hand today. Precious time and moments have been lost. It is now over six years since the Paris Agreement, and everyone agrees there is a yawning gap between the ambition we set then and the action required to get there.

This COP was different

But, despite what many of those dissenting voices say, this COP was different for several reasons. Firstly, it was the first time the whole world has been watching with genuine interest. Climate change is no longer seen as a niche, environmental issue pushed by green parties and activists; it is now viewed as the biggest global threat that everybody is aware of. The impact of the public will and mood cannot be understated. Politicians and leaders serve us, not the other way around.

Secondly, COP26 was different for the dramatic increase in representation from both business and finance – particularly the latter. The public will should not be understated here, either. When people vote with their wallets and their investments, making their ethics and morals well and truly known, capital will have to flow accordingly. The ballot box isn’t the only place to vocalise beliefs.

Armed with this intent and passion of the majority, the system can be changed. We can redraw the blueprint of capitalism to ensure market failures get corrected, so that polluters and free riders pay their share and do not put profits over people and the planet.

COP highlights

With all that in mind, I try to recall some highlights of my time in Glasgow.

I mentally thumb through all the main achievements of the first week (NB. I returned on the middle Sunday): the 100 world leaders promising to end and reverse deforestation by 2030; India’s 2070 net-zero commitment; Saudi Arabia’s 2060 equivalent; and the EU Commission chief Ursula von der Leyen and US President Joe Biden announcing a partnership to cut emissions of methane by 2030.

The second week saw the US and China declare they would put the climate before their geopolitical differences, but ended disappointingly with India and China intervening at the last minute to soften language around coal (pledging to phase it ‘down’, not ‘out’ by 2030).

My most spine-tingling moment came in the MP finance action zone when Al Gore, Mark Carney and David Blood assembled. It was here that Nigel Topping, the UK’s High-Level Climate Action Champion, stated that the $130 trillion firepower of the Glasgow Financial Alliance for Net Zero (GFANZ) and mandatory corporate transition plans were “not only the mic drop moments of the morning, but will likely be seen as among the most historic achievements of COP26”.

It is almost surreal. We have been seeking a net-zero financial alliance and mandatory transitions plans for so long. I am extremely proud to have been part of a team, an organisation, and many formal and informal coalitions pushing these ideas forward. Some of this progress and detail may seem arcane and few outside the world of policy and finance world will appreciate just how massive they are – but, believe me, these milestones are huge.

Equally inspiring was hearing Ashley Alder, the International Organization of Securities Commission (IOSCO) head, say: “Jurisdictions are going to need standards that can be independently audited so strengthening the assurance framework is critical. The IOSCO endorsement is the catalyst for getting this done and getting it done quickly. I am confident that we are going to get this done quickly.” I paraphrased a little here from memory, but he went on to welcome the formation of the International Accounting Standards Board sustainability sub-committee. Again, this was music to our ears.

I should also mention the book, music symphony, two documentaries and a film that we contributed to COP26 – all fizzing with emotion-stirring and thought-provoking content.

Why trust finance?

Answer: Macro stewardship.

Sceptics will argue the financial system is not fit for purpose. Look what happened in the lead up to and aftermath of the global financial crisis of 2007-09, they might say. They have a point, and their caution is understandable. What they may not have noticed though is just how much the sector is trying to reform itself; to identify the weak spots and seek to work with governments, regulators and, in extreme cases like climate change, multilateral institutions to structure markets differently to create the right behavioural incentives and curb risky and harmful practices.

A delicate balance between public and private capital must be struck. Neither will work without the other – and we know the unfettered extremities of both are not the answer. Ultimately, money needs to flow in two main directions: to solution providers (technology and innovation) who can help mitigate the effects of climate change and to the investments that will help us adapt. There will be opportunities as well as risks and, as those looking to accumulate wealth or draw down from it, investment returns matter from a social perspective – to pay the pensions of today and tomorrow.

There is no escaping the fact we need more effective regulation to ensure as just a transition as is humanly possible. This will involve compassion, as well as a seat at the table and development assistance, for developing nations – those most at risk from the ravages of global warming.

But how do you create systemic change? Or, put another way, how do you fix a system that isn’t working? Macro stewardship is a form of engagement that recognises the system is broken in places and therefore company-level engagement, however targeted and well-meaning, has certain limitations. It involves pulling on the levers of change – like litigation, regulation, standards, fiscal and public awareness – to create system-wide reform. It involves finding the change-making nodes of industry and policy and collaborating with them to design better outcomes. When married with the more established and accepted parts of sustainable investing, there is reason to trust that the industry can live up to its fiduciary duties.

Moving beyond borders

So, as I reached Kings Cross and readied myself to disembark, I thought back on the journey and my own branching trains of thought. There was a moment on the trip that stands out for its emotional richness and clarity. Staring out of the window as we travelled across the Scottish Borders, it was hard not to be awed by the unspoilt landscape (depending on your baseline starting point, that is). Regardless, it is breathtakingly beautiful. But it was not its beauty that captivated this time.

The borders and edges of places, spaces and ideas represent areas in life where anything seems possible. Just because somebody drew a boundary line there one day does not mean that is where it will be tomorrow. This is a great metaphor for capitalism. The climate crisis knows no borders. Odourless greenhouse gases float through the air without recourse to custom checks and security guards. It used to take imagination to see their silent and destructive force. That, unfortunately, is no longer the case. Its poisonous fingerprints are everywhere.

Sir David Attenborough clearly invoked the required sense of possibility, imagination and hope in his address to COP delegates. As he put it: “If working apart, we are a force powerful enough to destabilise our planet, surely working together we are powerful enough to save it.”

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The world’s ongoing failure to price carbon has led to a mishmash of command-and-control policies.

Nearly three decades after it first agreed to tackle climate change, the world has failed miserably to curb the growth in CO2 emissions. To succeed, it urgently needs to establish an effective price for carbon.

In the 1820s, French mathematician Joseph Fourier calculated an object the size of Earth, and at its distance from the Sun, should be considerably colder than the planet is if warmed only by the effects of incoming solar radiation. His consideration of the possibility the Earth’s atmosphere might act as an insulator is widely recognised as the first proposal of what came to be known as the greenhouse effect.

By 1992, with evidence of the perils of man-made climate change mounting, 154 countries agreed to begin to address the problem. Signatories to the United Nations Framework Convention on Climate Change (UNFCCC) in Rio de Janeiro committed to reduce atmospheric concentrations of greenhouse gases (GHGs). Nearly three decades and countless international conferences on, efforts to curb climate emissions have failed miserably.

Common problems

Climate change is a problem of the ‘commons’. The atmosphere is shared between countries and while a CO2-abating country incurs the full cost of its abatement, it receives only a small fraction of the benefits. As with any such public good, the self-interested response is to ‘free ride’ in the hope others will foot the bill. Instead, ways of addressing the problem by either taxing or imposing limits on emissions must be negotiated among sovereign nations.

The Kyoto negotiations in 1997 tried to create a global cap-and-trade system, whereby a limit on emissions was set at a global level following which individual countries would commit to cutting emissions beneath 1990 levels to varying degrees to meet that cap. The result was a patchwork of weak and unenforceable commitments that failed to address the free-rider problem. Nations have since stumbled through a series of summits and conferences to find a replacement without success.

How not to negotiate

According to Dr Stephen Stoft, co-editor of the 2017 book Global Carbon Pricing, the failure of successive negotiations is telling. To see where things have gone wrong, he says game theory, particularly the work of political scientist Elinor Ostrom, is instructive. She was awarded the Nobel Prize in economics for her innovative work which, against the grain, argued that common-pool resource over usage was not inevitable, or subject to a ‘Tragedy of the Commons’ as the ecologist Garrett Hardin suggested in 1968. Drawing on both the science of game theory and real-world examples, Ostrom showed cooperation could be maintained by the interaction of reciprocity, reputation, and trust.

Stoft says what Ostrom and others show is that to promote cooperation, a collective goal must be translated into a reciprocal accord: an agreement to abide by rules that specify ambitious behaviour, provided others abide by the same rules. Moreover, penalties for breaking the rules are needed to discipline free riders.

Yale professor William Nordhaus says if there is a single lesson to be learnt from economics, it is that “economic participants – thousands of governments, millions of firms, billions of people, all taking trillions of decisions each year – face a market price of carbon that reflects the social costs of their consumption, investment, and innovation”.

While Stoft agrees a uniform price would be economically efficient, he argues establishing a global minimum carbon price as a starting point would give the negotiations a much better chance of success. By providing a salient focal point for discussions, talks would likely be much more straightforward than those over a global cap-and-trade deal proved to be.

Skirting round the issue

All of which makes it hard to understand why successive UN climate change conferences have tended to skirt around the issue.

“Go all the way back to Rio, they talked about internalising the externality. It just hasn’t happened. We’re running out of time and urgently need a concrete plan of action,” says Thomas Tayler, senior manager in Aviva Investors’ Sustainable Finance Centre for Excellence.

Although the Paris Agreement talked about the need for a global carbon market, negotiators essentially kicked the can down the road. Article 6 is central to the integrity of the accord and negotiators have warned weak rules could undermine the entire agreement. Yet few appear to have much idea how the rules governing this mechanism could be made to work. Many doubt they ever can.

While some say resolving the article could make or break this year’s COP26 summit, both Tayler and Aviva Investors’ chief responsible investment officer Steve Waygood believe such expectations are unrealistic. The main impediment is that unanimity, or near unanimity, is required for agreement to be reached.

“Blaming the UNFCCC for not coming up with a global carbon price is unfair. It’s an inappropriate forum,” says Waygood.

Nordhaus holds out some hope for negotiations though. “In light of the failure of the Kyoto Protocol, it is easy to conclude that international cooperation is doomed to failure. This is the wrong conclusion,” he says.

Join the club

In April 2021, IMF chief Kristalina Georgieva said a “focus on a minimum carbon price floor among large emitters, such as the G20, could facilitate an agreement covering up to 80 per cent of global emissions”.^[2]

She appears to have taken her cue from Nordhaus, who in 2015 advanced the idea of establishing a ‘climate club’ as a means of breaking the deadlock.

Luca Taschini, associate professorial research fellow at the London School of Economics’ Grantham Research Institute, agrees this may offer the best prospect of meaningful progress. While establishing such a club would not be simple, even if just the EU and China could agree to impose a uniform price on all their carbon emissions “that would be a major step forward; you could then envisage the US wanting to join”.

By pricing carbon, governments capture the costs that the public pays for in other ways, such as healthcare costs from pollution, heatwaves and droughts, and damage to property from fires, flooding, and sea level rise.

However, establishing what that carbon price should be is not straightforward. It depends on a multitude of assumptions about future emissions, how the climate will respond, the impacts this will cause and crucially the discount rate applied to damages, some of which will be felt far into the future.

Currently, the IMF says a global carbon price of $75 or more per tonne is needed by 2030 to restrict global warming to below 2Cº^[3]; the Bank of England reckons a price of £150 might be needed^[4]; while the International Energy Agency said in May the price in advanced economies needed to rise to $130 by 2030 and to $250 by 2050.^[5]

The price is right?

Theoretically, countries or trading blocs could be given leeway to determine how to price emissions, whether via taxation, a cap-and trade system or a combination of the two, even if most economists tend to believe taxation would be the cleanest, most readily comparable, and therefore optimal method.

Forming a club would not be without its difficulties. But although it would need to be determined at what point in the production process a carbon price was to be collected, and countries would need to be monitored to ensure they were not cooking the books, few hurdles are insurmountable.

For the system to work, the thorniest issue would be the need for richer nations to transfer money to poorer ones. However, although discussions over the size of transfer payments undermined the Kyoto discussions, this does not mean renewed attempts are doomed to failure as well. Rather, it is an argument for setting a realistic initial carbon price, especially since there would be nothing to prevent richer nations from being more ambitious.

Taschini says that as well as the carrot of transfer payments to induce developing countries to set a minimum carbon price and join the club, a stick would be needed to discipline free riders and prevent carbon leakage. To avoid this, the obvious stick to use would be tariffs on imports from countries that refused to join the club.

This explains why the EU in July said it planned to introduce a carbon border levy by 2026. By holding products such as imported steel, aluminium, fertiliser and cement responsible for their emissions the same way domestically produced products are, the aim is to maintain the bloc’s competitiveness, prevent carbon leakage, and ultimately encourage other countries to match the EU’s ambition.

Carbon pricing schemes have been growing both in number and ambition. According to the World Bank, as of April 2020 there were 61 initiatives – 31 emissions trading schemes and 30 carbon taxes.^[6] However, those covered just 22 percent of global emissions.

Pricing power

One reason the world struggles to kick its addiction to fossil fuels is the perceived cost of doing so.

Although many activists and politicians promote climate mitigation policies as an opportunity to create jobs and boost growth, the argument looks specious. The fact so few countries come even close to doing their fair share speaks volumes. After all, burning carbon enables valuable activities to happen such as driving cars, heating houses and manufacturing steel. Taxing carbon, until greener replacements become more available, inevitably leads to a reduction in consumer welfare as those activities are reduced.

Having said that, establishing an effective carbon price seems unlikely to be as ruinous as some fear. Take a carbon price of $40. That would add around $74, around 12 per cent, to the price of a tonne of steel, $72 to the cost of a return flight between London and New York and would be equivalent to just 9.2 US cents (6.6 British pence) on a litre of petrol.

The world’s ongoing failure to price carbon has led to a mishmash of command-and-control policies. They range from the imposition of auto emissions standards or the complete phasing out of internal combustion engine car sales, to the subsidisation of various green technologies. In many cases these come at a high cost and are of questionable benefit.In many instances, with politicians unwilling to grasp the nettle, the problem is being outsourced to the private sector. While not denying the private sector has a vital role to play, for example by refusing to finance a coal-related project or demanding higher returns from investments in oil exploration companies, Waygood says it needs a carbon price to perform this function efficiently.

“We have the world’s biggest market failure in climate change, and this will go on until we start to price at least a significant chunk of worldwide carbon emissions more appropriately. While no one would suggest we immediately stop driving, flying, or using steel, the sooner we admit these activities come with a cost, the better,” he argues.

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References
[1] Hannah Ritchie and Max Roser, ‘CO₂ and greenhouse gas emissions’, Our World in Data, August 2020
[2] Andrea Shalal, ‘IMF chief urges G20 to adopt carbon price floor to reach climate goals’, Reuters, April 22, 2021
[3] Vitor Gaspar and Ian Parry, ‘A proposal to scale up global carbon pricing’, IMFBlog, June 18, 2021
[4] ‘Climate change – plotting our course to net zero – speech by Sarah Breeden’, Bank of England, May 18, 2021
[5] Anita Hafner, et al., ‘The importance of real-world policy packages to drive energy transitions’, IEA, July 9, 2018
[6] ‘Carbon pricing dashboard’, The World Bank, April 1, 2021
[7] ‘Carbon pricing dashboard’, The World Bank, April 1, 2021

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Mark Versey

Aviva Investors, the global asset management business of Aviva plc (‘Aviva’), has set out a series of proposals and recommendations to G7 and G20 nations ^[1] it believes will enable the global financial system to tackle the climate crisis in an effective and cohesive way.

The recommendations follow discussions held with a coalition of global allies – including asset managers, advisory firms, management schools, industry bodies and foundations – which advocates the creation of an International Platform for Climate Finance (‘IPCF’). The concept was first proposed by Aviva Investors in 2020 ^[2] to ensure global capital is being channelled into sustainable parts of the economy and that markets amplify – rather than undermine – the ambition of the Paris Agreement.

As part of the output from discussions of the Coalition for an International Platform for Climate Finance, Aviva Investors has also proposed that core principles of UN-affiliated finance initiatives be updated to better align with net zero ambitions and ensure they fully support the goals of the Paris Agreement.

Having outlined the rationale for the IPCF and its role as part of a globally coordinated strategy and response to finance the Paris Agreement, the recommendations put forward by Aviva Investors focus on the actions it believes are required to turn the concept into reality.

Mark Versey, Chief Executive Officer at Aviva Investors, said: “The current international order pre-dates awareness of the climate crisis and was originally set-up with the primary goals of sustaining world peace and supporting global economic growth. Since then, these frameworks have not been revisited, reconfigured, or redesigned to reflect other issues affecting the world today. To these goals, we need to add the challenge of climate change, which represents a growing and catastrophic threat to life on our planet. We believe an International Platform for Climate Finance could play a critical role in harnessing the considerable power of finance to tackle the climate crisis and support long-term net zero objectives.”

In the white paper, Harnessing the international financial architecture to deliver a smooth and just transition^[3], Aviva Investors highlights the following steps it believes can help to create a comprehensive strategy for the global economy, as well as ideas of how to finance the transition:

1. Invite the OECD to bring forward proposals for convening an International Platform for Climate Finance (IPCF).

2. Recommend that the G20/OECD principles of corporate governance be updated; develop a Convention on Fiduciary Duty and Climate Change; and update the OECD Framework for Consideration of Prospective Members to require net zero country commitments.

3. Invite IMF Board of Governors to clarify that the IMF’s mandate to promote sustainable growth and financial stability includes consideration of climate risk, and extend its Technical Assistance Climate Change Policy Assessments (CCPAs) to become a required part of all IMF Article 4 economic surveillance work.

4. Invite the World Bank to report back to the G20 Indonesia Summit in 2022 on how it can ensure the Systematic Country Diagnostic and the Country Partnership Frameworks are most supportive of the implementation of NDCs and to invite the International Finance Corporation to update, develop and extend its Environmental and Social Performance Safeguards to be more focussed on transition plans and Science-based targets (SBTs), as well as Taskforce on Climate-related Financial Disclosures (TCFD) requirements.

5. Clarify that the mandates of the Financial Stability Board, Basel Committee and International Association of Insurance Supervisors include the consideration of climate risk. Invite regulatory supervisors to report on how they intend to update regulation to better manage the exogenous and endogenous nature of systemic climate risks, in particular to analyse potential unintended consequences of the structure of banking and insurance prudential requirements.

6. Encourage finance ministries and central banks to participate in, and implement recommendations from, the Coalition of Finance Ministers for Climate Action and Network for Greening the Financial System (NGFS).

7. Invite the United Nations to collaborate with OECD IPCF to convene a UN Finance Assembly, including finance minister participants of Helsinki Principles, central bank governors of NGFS and CEOs of systemically important financial institutions (SIFIs).

8. Replicate the 2021 alignment of the country hosts of the G7 and G20 with UNFCCC COP co-hosts for the future triennial stocktakes and the five-yearly reviews of progress of the Paris Agreement. Importantly, this should be supplemented by the addition of a G77+ country as a third co-host for each of these COPs to maintain the principle of inclusivity.

Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, added: “Despite substantial efforts, the international community still lacks a cohesive strategy to finance the Paris Agreement and, collectively, we are falling well short of meeting the targets it lays out. To deliver that strategy, we need enhanced international cooperation between public and private financial institutions and a mechanism to track progress. We think it’s right to examine international financial architecture, to allow greater focus on raising the amount of private capital invested in climate adaptation and mitigation solutions globally, how this money can best complement public finance, and how public policy, globally, regionally and nationally can help accelerate capital flows. As we stare down the barrel of the climate crisis gun, now seems the time to take a different approach.”

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[1] https://www.avivainvestors.com/en-gb/about/responsible-investment/climate-finance-challenge/sustainable-finance-proposals-g7-g20/ 
[2] https://www.avivainvestors.com/en-gb/views/aiq-investment-thinking/2020/02/capitalism-and-climate-change/
[3] https://www.avivainvestors.com/en-gb/about/responsible-investment/climate-finance-challenge/sustainable-finance-proposals-g7-g20/ 

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