Unlike the first Rio conference, the meeting in June will not produce ‘hard law’ agreements (such as the climate and biodiversity conventions). Instead, the critical factor determining the success of Rio+20 will be the creation of serious policy milestones for 2015 and beyond. Central to this is whether Rio can convince investors that aligning their asset allocation with the green economy will provide better risk-adjusted returns than ‘business as usual’
Drawing on the analysis developed by the world's investor coalitions in 2012 – Investment-Grade Climate Change Policy: Financing the Transition to the Low-Carbon Economy – there are three ways that this could be done.
Build an integrated policy framework for green growth
Investors need clear short, medium and long-term sustainable development targets, which have political clout and are embedded in core macro-economic and sector policies. At the heart of the draft package is the proposal to agree a set of sustainable development goals by 2015. The potential is to provide a dashboard of critical changes that governments are committed to make through to 2030, giving institutions crucial guide rails for investment.
Energy provides a useful example of what could be done. The Zero Draft incorporates the three-fold goals of the UN's Sustainable Energy for All initiative: to ensure universal access, double the rate of efficiency improvement and double the share of renewable energy, all by 2030. These are all clearly important. But experience with climate policy has taught us the hard lesson that targets are only useful if baselines are robust, scope is clear and loopholes are closed.
In its World Energy Outlook 2011, the International Energy Agency projected that renewables – hydro, biomass, solar, wind, geothermal, marine – could grow from 13% of primary energy in 2009 to 23% in 2030 in its 450 PPM scenario. This is just short of a doubling, making this a good target to drive deployment.
Turning to energy efficiency, if the global rate of improvement was doubled to a 2% compound annual growth rate, then this could cut global GHGs by around 25% below the usual by 2030. But total emissions would still rise – and as BP highlighted in its recent Energy Outlook 2030, energy efficiency is expected to improve anyway.
A tougher ‘stretch target’ of halving the energy intensity of the global economy by 2030 would, we
estimate, drive GHGs to around 18% below 2010 levels. Beyond energy, the SDGs will need to incorporate real targets for other critical areas of ‘natural capital’ such as food, forests and soils, as well as oceans and freshwater – and show how these can be deployed to meet rising social needs. In addition, the proposed green economy roadmaps could – if done seriously – also provide a starting point for long-term investor engagement and benchmarking.
Phase out ‘inefficient’ fossil fuel subsidies
Shift the scale and direction of incentives: to mobilise capital, investors need to see policy incentives which address the real and perceived risks of the green economy, aim to deliver scale, and provide long-term visibility. The climate arena provides a wealth of experience of the need to confront market failures. Not only is carbon still un-priced in most economies, but $410bn of government subsidies are deployed globally to reduce the costs of fossil fuels; only $66bn is provided for renewables.
In 2009, the G20 committed to phase out ‘inefficient’ fossil fuel subsidies. Again, wording matters: seven nations subsequently stated that they did not have inefficient fossil subsidies. The Rio+20 draft picks up the theme – and focuses on gradually eliminating subsidies that have ‘considerable negative effects on the environment and are incompatible with sustainable development’. This would also include agriculture, fisheries and water.
Governments must play their role in change
More broadly, the Draft is currently weak in terms of generating greater government commitment behind the need for positive incentives (such as environmental pricing/taxation). This could prove a missed opportunity, as revenues can be useful in terms of cutting labour taxes and/or fiscal deficits particularly at a time of weak economic growth. For example, in California, half of the projected $1bn in carbon revenues from the new cap and trade system have been provisionally earmarked for deficit reduction.
Make sure that implementation actually happens: having policies is one thing, but making sure they're
implemented is another. Key to this is the need to keep score – and to provide investors with timely information on the links between sustainability and economic performance at the micro and macro-levels.
The Zero Draft does recognise the limits to current measures of GDP, but there is an apparent lack of urgency to develop solutions to the current invisibility of natural capital in standard growth models. More promising is the inclusion of the need to develop a global policy framework for all listed and large private companies to integrate sustainability within the reporting cycle.
This builds on the proposal from the Corporate Sustainability Reporting Coalition for Rio to launch negotiations for a convention that obliges governments to introduce a ‘report or explain’ requirement.
So the first draft of the Rio+20 political declaration offers glimmers of potential. If the text is strengthened between now and June, then it could provide the foundations for shifting capital towards the green economy. Like the Durban Platform agreed last December, an outcome of this kind could help frame the next up-shift in policy commitment through to 2015 and beyond, giving a vital boost to investor confidence.