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Against a backdrop of global warming and the approach of COP26 in Glasgow scheduled for early November, the Institut Louis Bachelier and l’Institut CDC pour la recherche de la Caisse des Dépôts organised a webinar dedicated to the challenges of the green recovery, which took place on 27 September.

After a few words of introduction from Stéphane Voisin, moderator of the event and coordinator of the interdisciplinary Green and Sustainable Finance programme at the Institut Louis Bachelier and Isabelle Laudier, head of the CDC Institute for Research at Caisse des Dépôts, who spoke of the public financial institution's support for scientific research into its areas of interest, including the ecological transition, the discussions got to the heart of the matter.

Paris Agreement trajectory off course

Patrice Geoffron, Professor of Economics at Paris Dauphine University – PSL, began with a reminder of the importance of the forthcoming COP 26, the current shock to energy prices in Europe, and the dominance of fossil fuels, which still account for 80% of the world's energy mix: "To achieve the goal of zero net emissions by 2050, the International Energy Agency recommends that we stop exploring for new hydrocarbon deposits now and stop operating coal-fired power stations.". In this respect, the development of alternative technologies, such as hydrogen in Europe, is an interesting option, even if it will not be sufficient.

In addition to the technological challenges and their financing, Patrice Geoffron also returned to the objectives of the Paris Climate Agreement, concluded in 2015. This is based on the voluntary contributions of countries to reduce their emissions in order to keep global warming below 2 degrees. At present, however, the current trajectory is well above the targets set in 2015: "The problem is to reduce the gap, taking into account the laws of physics linked to our planet's carbon budget, and the longer we delay, the more vertical the fall in emissions will have to be, which will cause immense socio-economic and technical challenges, because we have already delayed too long", noted the academic researcher.

Nevertheless, there are still grounds for hope, with strong growth in commitments to net zero carbon emissions: "More than 70% of global emissions are released in countries that have made commitments to achieve net zero emissions by 2050. The various countries concerned even account for nearly 70% of global GDP", continued Patrice Geoffron. To achieve this ambitious objective, countries need to commit as quickly as possible, and above all to demonstrate this through concrete action. "There is a gap between the lifespan of some equipment and the objective of carbon neutrality in 2050, particularly in network infrastructures and buildings, which will lead to stranded assets".

Other measures to be favoured around the world include "reducing subsidies for fossil fuel products such as petrol, because the price signal is currently working against the transition". In the same vein, the issue of carbon prices is also crucial: "Heterogeneous carbon prices are not helping to speed up the energy transition, despite the fact that this system is gaining ground around the world". In this area, it is Europe that is leading the way with its internal carbon market, but we will have to watch out for "redistribution problems between countries in the zone and within each of them, which will result from the increase in costs for households".

Financing the climate transition

In a second intervention, Anna Créti, Professor at Paris Dauphine University – PSL and Director of Chaire Economie du Climat, took a closer look at the relatively broad concept of climate finance, which is defined by the United Nations as: "Resources mobilised to finance actions to mitigate and adapt to climate change." The researcher went on to admit that "it was difficult to define a standard framework for climate finance, but after COP 21 in Paris, an annual target of $100 billion in financing from developed countries was determined, even though it is only $12 billion at present." The return of the United States to the Paris Agreement is expected to increase the funds allocated to climate finance. More recently, the Covid-19 pandemic has rekindled debates on the impact of man on nature, renewing interest and importance in financing the transition. Against this backdrop, the multilateral development banks have substantially increased their investments in climate protection, without however exceeding 30% of their portfolios. Another lever for climate finance involves corporate commitments. More than 200 major international groups have pledged to become carbon neutral by 2040, by accounting for and offsetting their emissions. However, this objective is different from that of zero net emissions, which necessarily implies a reduction in emissions and not simply offsetting.

After these explanations, is the post-Covid economic recovery really green? "Europe and other countries such as Canada are well placed in the green recovery, but many plans around the world are still emissive", admitted Anna Creti. To reverse this trend, she believes that regulation has a major role to play, in particular by reaffirming the principles and regulations associated with responsible investment, as well as aligning investment portfolios with the transition. In addition, economic incentives, such as subsidies for developing green technologies and research and development, are effective instruments. Finally, she ended her presentation with the concept of just transition, which implies including social criteria for economic activities to be qualified as responsible.

Caisse des Dépôts, a major financier of the transition

In addition to the context, the physical and technological challenges, and detailed explanations of the role of climate finance, there was a focus on France by Jöel Prohin, Director of the Investment Management Department at Caisse des Dépôts, "a major player in the transition, because large sums are being implemented in full coordination with the public authorities", in his words. In fact, the public institution has already committed €2.1 billion of its own funds to the ecological transition, out of the €6.3 billion allocated from 2020 to 2024. These funds are earmarked for developing renewable energies and sustainable mobility, as well as improving the energy efficiency of buildings and recycling waste. An ambitious €40 billion climate plan has also been launched for the same period. One of its aims is to accelerate the transition and encourage innovation. In other words, as a long-term institutional investor, Caisse des Dépôts finances and participates in the transition. In fact, it was one of the first major players to join the Net-Zero Asset Owner Alliance, which has 46 members worldwide, including major insurance companies and pension funds. "The asset portfolios of these institutions must move towards a goal of zero net emissions by 2050. To meet this commitment, targets are set every 5 years", emphasised Joël Prohin. The aim of this alliance is to pool the strengths of major long-term investors to develop sustainable solutions, particularly in terms of the methodology and monitoring needed to define environmentally-friendly investment policies.

Finally, to conclude his speech, the investment specialist insisted: "This alliance aims to play an umbrella role and represents a major element of Caisse des Dépôts' future policy as an institutional investor in the coming years. This translates into day-to-day decision-making and, above all, a policy of commitment. In fact, it is through a trusting and regular dialogue with companies that we will be able to make them perceive, as financiers and shareholders, that they need to adapt their business model to enable us to achieve our objectives. We won't be able to do this without them, or without the commitments of the governments that define our policies". Clearly, the success of the ecological transition requires the mobilisation and coordination of several stakeholders around the world.

Click here to watch the replay of this event