Environmental Finance

Professor Martina LinnenlueckeProfessor Tom Smith

The Paris Accord

At the Paris climate conference (COP21) in December 2015, 195 countries adopted the first-ever universal, legally binding global climate deal.

•Global action plan to avoid dangerous climate change and limit warming to well below 2°C

•Agreement is due to come into force in 2020

•Key elements – mitigation, adaptation, loss and damage, support for developing countries

The Paris Accord

Agenda

•The science behind the Paris Accord

•Threats to businesses, assets, profits, and human capital

•The case for action

•Research findings and business opportunities

Business and Global Environmental Change

Setting the Scene

U.S. Global Change Research Act of 1990"Global change" means changes in the global

environment (including alterations in climate, land productivity, oceans or other water resources,

atmospheric chemistry, and ecological systems) that may alter the capacity of the Earth to sustain life.

Global Environmental Change

Sustaining Human Life

How far can we go? Is there a tipping point?

Tipping Points?

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tipping pointcoral dominance

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algal dominance

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• Overexploitation •Commercial-scale use of ecosystems

•Continuous heavy land use (agriculture, grazing)• Phosphorous accumulation in soil and mud

• Land management and fire prevention practices• Disease outbreaks

• Extreme events• Warming

From a Desirable to an Undesirable State

Our precarious predicament

From a Desirable to an Undesirable State

Threats to Businesses, Assets, Profits, and Human Capital

Global Environmental Change

The Impacts on BusinessWhat are the planetary boundaries? What does this mean for your business?

Climate change BREACHEDBoundary: < 350 ppm CO2

• The Paris Accord introduces caps on carbon emissions on a country-level• Emergence of new technologies and the ‘creative destruction of old technologies• Early retirement of emissions-intensive plants• Redistribution of investment; shareholder pressure• Adverse impacts from climate change

Loss of biosphere integrity BREACHED • Pressure from degraded ecosystems (terrestrial, freshwater, marine)• Decline of natural resource inputs (fibre or fuel)

Changes to biogeochemical flows nitrogen and phosphorus

BREACHEDP Boundary: max. 6.2 million tons P/yearN Boundary: max. 62 million tons N/year

• Degradation of ecosystems and ecosystem resilience• Possible restrictions on use of phosphorus and nitrogen, especially in agriculture• Advances in biotechnology to develop different plants types

Land use change BREACHEDBoundary: no less than 75% biome intactness

• Degradation of ecosystems and ecosystem resilience• Expansion of organisational activities into higher-risk areas (floodplains, coastal zones)• Greater risk from land degradation and erosion

Release of novel entities Multiple boundaries, yet to be quantified• Possible changes in regulation or restrictions on the use of chemicals in industries such

as medicine, agriculture, consumer goods (e.g., micro beads)• Restrictions on new technologies (e.g., genetically modified organisms)

Atmospheric aerosol loading Regionally determined.• Tighter regulations in microparticles emitted into the air• Increased regulation to address local air pollution• Increased scrutiny around ‘exporting pollution’ by shifting manufacturing to places with

lax regulatory controls

Freshwater abstraction Global boundary: 4000 km3 water use/year• Water shortages with implications for water-dependent industries

Ocean acidification Boundary: ≥80% of pre-industrial ocean ∧CaCO3

• Damages to marine organisms, impacting commercial fisheries• Loss of coral reefs and impacts on tourism (bleaching of the Great Barrier Reef)

Loss of stratospheric ozone due to CFCs

Boundary: latitude-dependent• The discovery of the ozone hole led to stricter standards• Phasing out of ozone-depleting substances

Disasters Worldwide

Source: Geo Risks Research, Munich Re

The Case for Action

Global Environmental Change

Ecological Threat and Emotive Case...

The Moral Case

– Known risks backed by overwhelming scientific evidence reinforced by huge grass root movement pointing this out

– Very difficult to argue ex post that you were not aware of the risk and the science behind it.

– Firms, governments already losing legal cases

The Legal Case

The Hague, 24 June 2015 –nine hundred co-plaintiffs were victorious in a climate case, forcing the Netherlands government to adopt more stringent climate policies. The district court of The Hague has granted the plaintiffs’ claims, and the government is now required to take more effective climate action to reduce the Netherlands’ considerable share in global emissions. This is the first time that a judge has legally required a State to take precautions against climate change. This verdict will provide support to all the other climate cases around the world.

The Netherlands was aiming to cut its greenhouse emissions by 17 per cent by 2020, but the court has ordered that they must be cut by 25 per cent in the same time frame.

The case may enshrine the principle of protecting citizens from harm – including future generations.

Previous lawsuits in which individuals or groups sought recompense for losses caused by climate change failed because climate change cannot be pinned on individual countries or companies.

The Legal Case

The Legal CaseA federal magistrate judge in Oregon allowed a lawsuit filed on behalf of 21 teenagers and children to go forward, despite motions from the Obama administration and fossil fuel companies to dismiss it; the suit would force the government to take more aggressive action against climate change. Kelsey Rose Cascadia Juliana, et al., v. United States Of America, et al.,The United States District Court For The District Of OregonCivil No. 6:15-cv-01517-TC, April 2016

The young plaintiffs, led by the environmental law nonprofit Our Children’s Trust, argued that the Obama administration and the administrations before it had ample evidence of the risks of climate change and “willfully ignored this impending harm.”The lawsuit calls for the courts to order the government to stop the “permitting, authorizing and subsidizing of fossil fuels” — by, for example, canceling plans for projects like a liquefied natural gas export terminal in Oregon — and “to develop a national plan to restore Earth’s energy balance, and implement that national plan so as to stabilize the climate system.”

Other Cases 1. Our Children’s Trust scored a victory in Washington State in June 2015 whenKing County Superior Court in response to a challenge by 8 young citizens ordered the State Department of Ecology to develop an emissions reduction rule in response to a legal challenge from Our Children’s Trust

2. A farmer in Peru, sued a German utility, RWE AG, for its proportional contribution to global climate change. Action is to be head in a regional court in Essen Germany. According to a 2014 study, RWE AG is responsible for half a per cent of the total emissions that were released into the atmosphere since the beginning of industrialisation. That study is: Heede, Richard. "Tracing anthropogenic carbon dioxide and methane emissions to fossil fuel and cement producers, 1854–2010." Climatic Change 122, no. 1-2 (2014): 229-241.

3. A law student at the University of Waikato, has filed a lawsuit in the High Court in Wellington against New Zealand’s climate change minister. The 24-year-old claims the government has failed to set emissions targets that reflect the science on climate change and she is calling on the High Court to review New Zealand's emissions targets. The case initiated in November 2015 is a follow on to the successful Netherlands action.

The Business Case

… the business case?

• Businesses exist to create value. Any business that does not add value will either:– Be forced to change; or,– Cease to exist.

• We address the questions of:– What is value and how is it

measured? – How does a well run business create

or add value?

• The natural environment is now introducing new changes that alter the foundation of value creation.

Setting the Scene

Financial Shareholder Threat Case

… Shareholder pressure…

Carbon Disclosure Project

Divestment

Stranded Assets

Climate Change & Business: Considering Scale

The Business Opportunity Case

… Business Opportunities…

Opportunity

Melting Arctic Sea Ice and Business responses...

Research Findings

Research Findings

DivestmentLinnenluecke, M., and Smith, T. et al. (2015). Divestment from fossil fuel companies: confluence between policy and strategic viewpoints. Australian Journal of Management, 40 3: 478-487.

Research Topics

Valuing OpportunitiesLinnenluecke, M., and Smith, T. (2015). Climate (in)action: a real options approach to investigate the impact of climate change policy on new technology uptake. In: European Group of Organization Studies (EGOS), Athens, Greece

Research Topics

Clean Technology

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Cleantech OpportunitiesLinnenluecke, M. K., Han, J., Pan, T., & Smith, T. (2017). How markets will drive the transition to a low carbon economy.

Research Topics

The Role of Accounting in Supporting Adaptation to Climate ChangeLinnenluecke, M., Birt, J., and Griffiths, A. (2015). The role of accounting in supporting adaptation to climate change. Accounting and Finance, 55 3: 607-625.

Research Topics

Executive’s Engagement with Climate ChangeLinnenluecke, M. et al. (2015) Executives' Engagement with Climate Science and Perceived Need for Business Adaptation to Climate Change. Climatic Change, 131 2: 321-333.

Research Topics

Impairment from Environmental ChangesLinnenluecke, M., Birt, J., Lyon, J., and Sidhu, B. (2015). Planetary boundaries: implications for asset impairment. Accounting and Finance (Online First) .

Research Topics

Climate Fear Gauge

A volatility index modelled after the VIX Index (pictured), that provides investors, economists, financial media, and researchers with insights into investor sentiment around clean tech/fossil fuel stocks and expected levels of market volatility

Linnenluecke, M., Smith, T., and Whaley, R. E., in progress

Research Topics

Looting or Profit MaximisationLinnenluecke, M., Smith, T., and Whaley, R. E.In progress

Research Topics

The Right Climate for Informed Trading: UN Climate Meetings under the SpotlightLinnenluecke, M., Ling X., Chen, X., Smith, T., and Whaley, R. E.

Research Topics

Stranded AssetsLinnenluecke, M., Coquemas, F., Smith, T., & Whaley, R. E.In progress

Research Topics

• There is a high degree of preparedness for an upcoming clean tech revolution:– R&D expenditures by government and businesses– Large number of clean tech patents

• Paris Agreement led to commercialisation breakthrough

• Clean tech is a technology and over time technology cost decrease

Clean Tech Revolution

• There have been a number of technological breakthroughs over the history of modern markets (Hong et al 2008, JFE):– Railways– Electricity– Automobiles– Radio– Micro electronics– Personal computers– Biotechnology– The internet

• Clean Tech is the next technological breakthrough

Clean Tech Revolution

• Big Question is what will the Clean Tech Technological Breakthrough look like and how will it unfold

Clean Tech Revolution

Earth at Night

Options for Action