Sending Money Managers with Laptops to Copenhagen

The UN meeting in Copenhagen in December to try and set new rules of the game on emitting green house gases, namely carbon dioxide, was in or around most conversations in Europe when I was there a few weeks back. Officially it is called the UN Framework Convention on Climate Change, and now in its 15th iteration. In simple terms, money managers are interested to know how the Kyoto Protocol gets updated, and impacts the price for pollution per country and sector based on government reactions. That is a lot of paper, bums on seats, and carbon-intensive travel, yes? Investors care because any change in regulation, anything that changes the costs structure of valuing a business, will impact the valuation of a firm, and so the investment in that firm. Leading ESG thinkers continue to try and improve the metrics, and why FTfm covers stories most Mondays. Money managers have been pushing companies to understand climate change impacts for years, through initiatives like CERES in the US and IIGCC in Oceana and Europe.

Pretty much any NGO or international organization (IO) in the sustainable finance or green investment space is putting out a position paper or shaping to be near the action, for example WWF Copenhagen Expectations. The UN is giving it a full-court press, see UN Climate Change, and Denmark is using it like China used the Beijing Olympics as a window on their world. Perhaps Greenpeace will find some more coal ships to clamber up and use as billboards – did you see the photos | video from the Italian G8 summit. Pretty good approach to non-violent protest (do you also wonder how the crew did not slip loose the abseiling rope above the dude hanging above the water?). The Greenpeace focus on G8 was pretty punchy. It made news in Africa on account of it being South African coal loaded at Richards Bay Coal Terminal on the KwaZulu-Natal north coast not far from Mozambique, nor the pristine iSimangaliso World Heritage Site of the St Lucia Estuary and Sodwana with its whale sharks.

The mechanics of negotiating new climate change rules was rudely made apparent in a simulation exercise we did at the Tallberg Forum, hosted by Drew Jones, Sustainability Institute, USA for a consortium of NGOs, universities and think tanks like MIT, foundations and companies like Nike, Fidelity Investments, Schlumberger and Citi. Check The C-ROADS simulation aims to do what the Prius dashboard or prepaid cellphones do: kep score. Keeping score by illustrating where the negotiations get us. Actually, maybe not that different from Greenpeace, just a lot more acceptable to the suits. An XLS-based algorithm drives graphs of the numbers describing the net effect ot the planet of all the positions and commitments. The graph captures the respective negotiating positions of parties to an agreement and in coloured lines describes how those commitments to investment capital in mitigating or adapting to climate change will affect the “score”, illustrated by the parts per million (PPM) and average expected temperature. Scientists have us pointed toward 350-450ppm and not more than +2C if we aim to keep enjoying the planet as we have. The designers of the simple software want negotiating parties to use it live in Copenhagen, as a kind of reality check, past the plain communiqués and statements (vague ones such as those that came from the G8 meeting in Italy).  I recommend getting some mates to play out the scenarios, check Climate Change Exercise here, and watch how badly some people handle the pressure of negotiating!

The simulated negotiation exercise was powerful too for putting the group into three groupings (developed countries, developing countries, and small countries and island states) with the way we played it out with subtle details like having the islands grouping I was in have no chairs, and sitting on the floor , while the developed countries had chair, flowers and fruit in their corner. Excellent role-play. Having been the undercover activist from time-to-time, my first offer to our group – basically nations like Maldives and Micronesia that will sink beneath rising oceans – to exit the chamber, or rather to barricade the doors until the other nations reached agreement. The simulated negotiation played out, and we laughed as our Tanzanian colleague pretend to be the US, and a Zimbabwean colleague spoke for China and Brazil. We, the threatened tiny nations, promised to send climate change refugees, one million men, women and children per annum, to join our favourite developed country and lean on their social security net: that got a reaction! The knotted stomach though came as we realized this was how it may play out for real in December. For keeps.

One of the leading pension fund and money manager groupings active against climate change since 2003 has been the Institutional Investors Group on Climate Change, IIGCC. The IIGCC published its second annual report yesterday, Second Annual Report - Investor Statment on Climate Change and represents assets of USD 5,575 bn . The report reflects the work by money managers in asking questions covering climate change from their underlying company investments, and fully 90% are engaging the companies to do more. But most interesting finding for me, was that the push to engage, a notoriously vague term with mixed or unmeasurable results, has played out. One of the leading ESG thinkers and head of responsible investment at Insight Investment, Rory Sullivan, was reported in FTfm as saying “We’ve got to the limit of engagement without stronger incentives”. Check II's responsible investment page. Now money managers are feeling that the push to companies on business case or ethical case bases has reached its maximum, this is where regulation will make the next big breakthrough. FTfm's Sophia Grene reported Stephanie Pfeiffer, programme director at IIGCC for the four workstreams as saying “We’re going to be trying to influence the policy-making in the run up to Copenhagen”. Knowing how adept money managers are with their spreadsheets, and the fountainhead of information that crosses their terminals and screens daily, I think a few money managers and analysts should accompany negotiators to Copenhagen, armed with XLS to immediately demonstrate what the numbers will mean. The money managers may even improve the simulation graphics. I wonder if they could get the Climate Change Exercise software to simulate a boatload of one million poor climate change refugees floating across the floor halfway through some waffling negotiation impasse…