Investors call for stronger carbon market
London, 21 May: An alliance of institutional investors managing €4 trillion in assets has called for carbon markets to be strengthened and broadened – but is also calling for alternative policies to attract climate-related investments in developing countries.

The Institutional Investors Group on Climate Change (IIGCC) – a grouping of predominantly UK-based asset managers and owners – has produced a report squarely cleaving to market orthodoxy, in its calls for tighter carbon caps, the wide use of carbon offsets and the linking of carbon trading schemes. It also calls for the extension of cap-and-trade systems to the “advanced developing countries”.

All these moves would deepen market liquidity and lead to more predictability in carbon pricing, the IIGCC argues.

“To date … carbon markets have not provided investors with the strong, long-term price signals that are necessary to support large investments in low-carbon solutions,” the report says. It also argues that markets are suffering from a lack of transparency in the release of market data, for example.

The report expresses support for the Kyoto Protocol’s Clean Development Mechanism (CDM), but calls for its environmental integrity to be tightened, its scope broadened beyond its current project-by-project approach and its institutional underpinnings to be strengthened. The CDM allows emissions reduction projects in developing countries to earn carbon credits which can be sold to industrialised world companies and governments for use towards Kyoto targets.

However, the IIGCC argues: “The carbon markets and the CDM alone will not generate the significant investment flows required to tackle the climate change crisis.”

In another report, the IIGCC sets out proposals for alternative financing mechanisms to catalyse private sector investment in climate change mitigation. It suggests that multilateral and bilateral financial institutions offer a range of tools already used in other arenas – such as guarantees, credit lines and seed financing for funds – to help generate private-sector climate investments.

But it also argues that “strong, stable, transparent and credible” national policies are essential in attracting private sector investment in renewable energy and other low-carbon technologies. It advocates “an international system that registers, oversees and reviews national action plans”.

“A coordinated approach among governments would help counter the development of a complex patchwork of policies which risks preventing the international deployment of private capital, innovation and entrepreneurialism on the scale and with the urgency required,” said Rob Lake, head of sustainability at APG Asset Management in the Netherlands.

The report also expresses support for ‘climate bonds’, issued by OECD governments with the proceeds directed towards climate change mitigation. However, it says that such bonds should be as attractive from a risk-return perspective as conventional government bonds, and offer “tangible evidence for investors” of their climate change benefits.