Affirmative Impact - Winter 2016

Posted on Thursday, January 14, 2016

COP21: Success! But Hold the Applause

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By Holly A Testa

The headlines describing the outcome of the much anticipated 21st
United Nations Climate Change Conference (Conference of the Parties or COP21) ranged from ecstatic to dismal.

The Guardian hailed the agreement as "the world's greatest diplomatic success," while the Globe and Mail described it "a colossal waste of time." As is so often the case, the truth lies somewhere in between.

The Good News: The Parties Agree!

The 32-page agreement is remarkable-simply because it exists at all. It is the culmination of a process that began in 1995 in Berlin. The COP history of meetings is rife with all of the political machinations, disagreements over single words, inflated expectations, and failed negotiations that one might expect with the substantial majority of nations on the planet trying to reach agreement.

In summary, 196 nations have agreed:

  • To attempt to keep global temperatures "well below" 2.0°C (3.6°F) above pre-industrial times and "endeavour to limit" them to 1.5°C;
  • To limit the amount of greenhouse gases emitted by human activity to the same levels that trees, soil, and oceans can naturally absorb, beginning at some point between 2050 and 2100;
  • To review each country's contribution to cutting emissions every  five years; and
  • That rich countries will help poorer nations by providing "climate finance" to adapt to climate change and switch to renewable energy.

These are fine aspirational goals, long fought for and hard won. A global agreement that we indeed have a problem and need to do something about it is the most important step on the path to a low carbon economy.

Unfortunately, positive intention alone will not get the job done. Much of the agreement is not binding, and so if a country does not meet its targets, what happens? Well, nothing. And while the goals stated above are admirable, if they are unachievable at the outset, the main outcome may just be a false sense of security.

The agreement itself recognizes that it is really no more than a unified call to action. One of the opening paragraphs cites:

AI Graphic - COP21 Celebration"… the urgent need to address the significant gap between the aggregate effect of Parties' mitigation pledges in
terms of global annual emissions of greenhouse gases by 2020 and aggregate emission pathways consistent with holding the increase in the global average temperature to well below 2°C above pre-industrial levels…"

In other words, the goals that have been established as absolutely necessary cannot be achieved by the commitments that have been collectively made to meet the goals. So, how can the gap be closed?

There are many opportunities, but cutting fossil fuel subsidies seems to be the most obvious. The International Energy Agency (IEA) estimates that global consumer subsidies for fossil fuels amounted to about $548 billion in 2013, in contrast to $121 billion allocated to renewable energy. According to the International Institute for Sustainable Development and the Nordic Council of Ministers, eliminating fossil fuel subsidies would significantly cut greenhouse gas emissions within five years.

A second step would be accounting for externalities to ensure that fossil fuel producers bear the cost of emissions-costs not presently reflected in pricing.

Can Wall Street and Main Street Lead the Way?

Putting a price on carbon, whether through a tax or some type of trading scheme, is a "hot potato." But the concept is starting to take root, with 40 countries and 435 corporations adopting some sort of carbon price as of 2015. As a recent Bloomberg editorial points out, "Now that six of the world's largest oil companies have essentially come out in favor of a carbon tax, it's getting harder to dismiss the idea as some kind of outlandish lefty plot."

Indeed, even the late Milton Friedman, Nobel Prize winning economist and prominent champion of free markets, would probably have envisioned a place for a carbon tax, according to his fellow economists at the University of Chicago. Michael Greenstone, the Milton Friedman Professor of Economics at the University of Chicago, points out that the pricing system is not working because "…carbon is priced at zero. The problem isn't the U.S. has no carbon policy, but that it has a poor carbon policy-that it's fine to pollute."

The primary objection to carbon pricing is that it amounts to government interference in the free market. However, Steve Cicala, Assistant Professor at the Harris School of Public Policy, points out that this is not the case at all. "The problem" said Cicala, is that "there is no market for carbon. This is a case where the government can set the market and then get out of the way and let the private sector figure out what's the best way to get
to low carbon energy."

Major banks and companies clearly agree with this sentiment. Many sent strong signals to Paris advocating both a strong agreement and a price on carbon.

The investment community sent their own signals to Paris. For example, First Affirmative joined with 38 other institutional investors in advance of COP21 and committed to making energy efficiency an important consideration in the investment analysis process. We also committed to focus on energy efficiency when we engage with companies, vote on shareholder proposals, and select managers.

Wall Street and Main Street see that there are opportunities and benefits in a successful transition to a low carbon economy, and "opportunity" is where capital investment naturally flows. With global governmental support and increasing certainty that the transition will indeed take place, the marketplace will increasingly support, rather than hinder progress.

The COP Legacy

Ultimately, the most important legacy of the lengthy international political process that led to the COP21 agreement may be the signal it sends to the private sector. This global agreement makes it clear that the only way forward is to dramatically reduce the use of fossil fuels and transition to a global economy based on renewable energy. The faster, the better!

Perhaps the unity shown by 196 countries along with countless individuals, governments, companies and
NGOs brings us one step closer to Malcolm Gladwell's tipping point: "That magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire."

America's Most ComprehensiveAI Graphic - CPP
Plan to Fight Climate Change

By Laura Isanuk

In an effort to show that the United States is serious about combating climate change prior to COP21, President Obama announced his Clean Power Plan (CPP) to the world in August, 2015. The CPP was developed under the Clean Air Act of 1973 which requires the Environmental Protection Agency (EPA) to take steps to reduce air pollution that harms the public's health.

Welcomed as the most comprehensive U.S. policy commitment to date, the plan aims to reduce carbon dioxide emissions from existing power plants by 32% from 2005 levels by 2030. The CPP has a particular focus on coal burning power plants, which are widely considered to be the "dirtiest" way to generate electricity.

Specific targets vary state by state in order to provide flexibility to meet an appropriate goal. State plans are due in September 2016, but with extensions allowed until 2018. Considering the necessary review time by the EPA, it will likely be 2022 before anything is actually implemented.

The EPA expects significant benefits to accrue from the Clean Power Plan, including tens of thousands of new jobs, $85 in energy bill savings for the average American family by 2030, and a reduction in premature deaths and asthma attacks.

Highly Controversial

Twenty-seven states and various fossil-related businesses are suing the EPA. The suit is based on questions around whether the EPA has the authority to impose these rules under the Clean Air Act.

Interestingly, many state governors, large cities, and over 365 major business and investors have condemned the lawsuit and are publicly supporting the plan. It could go all the way to the Supreme Court like Obamacare did. But that will take years; in the meantime, most of the states included as plaintiffs in the lawsuit are crafting plans to comply with the CPP.

What does this mean for the investors?

Regardless of where the Clean Power Plan ends up, there is unmistakable progress in the energy field. As global temperatures rise and "fossil-fuel free" investment strategies are embraced by a broader segment of investors, the CPP is likely to help put the United States back on track to be a leader in the clean energy arena.

At First Affirmative, we strongly believe that investing in clean energy can deliver better investment performance for our clients while helping to mitigate systemic risk. Get ready; investment and innovation in the energy sector is about to reach efficiencies we have never seen before!

Climate Change Case Study

Polls may indicate that most Americans are concerned about the impacts of climate change, but you would never know it from our choice of automobiles.

In spite of the technological advances and availability of high mileage and electric vehicles, it is the bigger, lower mileage SUVs that are increasingly the vehicles of choice in the U.S.

With gasoline prices down to their lowest levels in over six years, 59% of vehicles purchased in 2015 were SUVs, pickup trucks, and other larger vehicles-as compared to 54% in 2014.

This trend in consumer behavior is at odds with the goals set by the Obama administration to increase the average fuel economy of the fleet to 54.5 miles per gallon by 2025.

Given that the achievement of this goal is a key part of the U.S. commitment to reducing greenhouse gas emissions, it is clear that current fuel prices are sending exactly the wrong signal. The current trend in vehicle purchases virtually guarantees that we will not meet our commitment unless
we change course-and soon.

2015: An Impactful Year for Responsible Investing

By Mike Sakraida

Here are five important stories that illuminate meaningful trends shaping the future of investing.
After many years of path breaking effort, we may finally be approaching a tipping point where
responsible investing is all of a sudden considered to simply be smart investing.

1. Department of Labor Interpretative Bulletin: ERISA Fiduciary Standard

This story ranks number one because it influences all investment professionals with fiduciary
responsibility, not just those working with ERISA (Employee Retirement Income Security Act) plans. In this interpretive bulletin, DOL clarifies that a fiduciary who prudently concludes that an investment which integrates environment, social, and governance (ESG) factor analysis is justified based solely on the economic merits of the investment. Collateral goals do not need to be evaluated as tie-breakers.

2. A Record-Breaking Year for Advocacy and Engagement

A record number of social and environmental shareholder resolutions were filed with public companies in 2015. According to Proxy Preview, the SRI-based resolution categories are, in declining order, by percent of total: the environment, human/labor rights, sustainability, diversity, and animals. First Affirmative filed or co-filed 15 shareholder resolutions on behalf of clients last year.

3. IRS Removes Tax Barrier to Impact Investing by Foundations

A September 2015 announcement by the IRS said that foundations would not automatically be taxed on gains from mission-based investments, including SRI/ESG investment strategies. The threat of this tax had motivated many foundations to limit impact investments to 2% of their endowments. The IRS said that foundations must exercise the ordinary business care and prudence in making investment decisions to support, and not jeopardize, the furtherance of the foundation's charitable purposes. There is no legal mandate to invest only for the highest return, lowest risk, or greatest liquidity.

4. New York Attorney General Enforces Climate Change Disclosure Rules for Public Companies

New York State Attorney General, Eric Schneiderman, went after ExxonMobile and other companies doing business in New York State for not complying with climate change reporting rules. This caused the Securities and Exchange Commission to increase its enforcement actions related to public companies that are not fully and properly disclosing the impact of climate change in their public filings.

5. Ever Growing Investor Appetite for SRI Investment Programs

According to a study published in early 2015 by the Morgan Stanley Institute for Sustainable Investing, 71% of individuals are open to sustainable investing-and only 37% of investment professionals are even somewhat interested. Recognizing both the gap as well as the growing client demand, a number of large firms jumped into the SRI pool in 2015. Better late than never.

Affirmative Impact is a publication of independent Registered Investment Advisor, First Affirmative Financial Network, LLC. The opinions and concepts presented are based on data believed to be reliable; however, no assurance can be made as to their accuracy.

The views expressed herein are those of First Affirmative and may not be consistent with the views of individual investment advisors or Broker-Dealers or RIA firms doing business with First Affirmative. Network Advisors may offer securities through various Broker-Dealers and Registered Investment Advisory firms. These affiliations, and all fees charged to clients, are clearly disclosed.

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