On the eve of historic climate change talks at the 22nd Conference of the Parties in Marrakech, the  Economist Intelligence Unit (EIU) asked this policymaker-turned-investing adviser about incentives, interests and the role of the private sector in addressing climate change for a Q&A commissioned by the United Nations Foundation.

The Q&As explore progress towards and what remains to be done to meet the Sustainable Development Goals (SDGs), or 17 UN-backed goals which more than 190 countries in 2015 agreed to prioritise as national targets. These targets include reducing environmental degradation and improving education, health and industrial innovation.

Mr Gifford developed the UN-backed’s “Principles for Responsible Investment” (PRIs) and is an adviser on corporate and environmental social responsibility for funds with investments in companies  in nations across the world, including Indonesia and Bangladesh.

Excerpts from an interview, as told to the EIU: 

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EIU: The PRI initiative has been successful, in part, because the principles incentivise investors to consider the environmental, social and governance impact of their actions and assets. Is this approach true of the COP22 (Conference of the Parties) as well? What do you believe will most move Paris Agreement signatories to fast track legislation to curb climate change, such as a carbon tax? What will push businesses to adhere to such measures?

James Gifford: It’s very difficult to see how to speed up transition without some sort of price signal, whether that’s cap-and-trade or a tax on emissions. These are the most economically efficient ways to address a problem in a market-friendly manner. Almost all economists will agree—without either of those two, it makes it difficult.

[But] it is not only about investing in new projects. Ninety-seven percent of the economy is already in existence. So a huge element of achieving the SDGs is finding ways for the current economy to become more sustainable through improving energy efficiency, process redesign, upgrades and refurbishments. This will require investors to engage with companies within their portfolios and directly press for improvement in environmental performance. 

Many companies feel they can’t invest in some of these technologies or environmental strategies, because they think – and in many cases rightly so – that their shareholders are short-term thinking and are pushing for quarterly outperformance at the expense of long-term investment. Although many of these environmental projects may be strong investments that will pay off over time and the financial models make sense, because of the long-term time frame involved, often they will not be taken up.

There’s a really important role for shareholders not just to invest in sustainable projects but also to send strong signals through shareholder engagement to the companies in their portfolios that they need to engage in these types of longer-term sustainability investments. If they choose to exercise that influence in a positive way rather than pressing for short-term financial outperformance, then that’s both economically efficient and helps to address SDG environmental challenges.

EIU: What financial or economic incentives have been most successful at bolstering environmental protection to date and why? For businesses, consumers or governments?

James Gifford: The pricing of externalities [the secondary or unintended consequences of an action] remains the most economically efficient way of addressing most environmental issues. However, I’d add that in developing countries, it’s not just about pricing externalities; it’s about providing risk reduction and institutional arrangements to facilitate the flow of capital. Development finance institutions like the IFC [International Finance Corporation] have done a good job of supporting developing countries’ enterprises by putting risk capital to work and then crowding in the private sector, which has more confidence in coming in behind them.

Similarly, the impact-investing space is starting to build an ecosystem of funds and opportunities in developing countries. For example, there’s a thriving ecosystem in East Africa around renewable energy and micro-payment solutions in terms of investable funds and direct investment.

EIU: You have spoken frequently about transparency and tracking progress. How can the environmental SDGs best be measured?

James Gifford: The key issue from impact- or sustainable-investors’ perspective is the concept of additionality.

People might claim that something is an SDG fund because it invests in companies that solve an SDG. But unless they add additional capital to scale or increase the positive effects of the company on society or the environment, it doesn’t necessarily make an impact. Simply buying shares in liquid markets from someone else isn’t impactful.

There needs to be additionality in the allocation of capital to actually solve problems. That’s a key point. And, of course, then you measure what impact that has on the ground.

EIU: You have worked in intergovernmental organisations, academia and industry. Which sector should play an outsized role to curb climate change?

James Gifford: You can’t really pull out one sector; from an investment perspective, there needs to be collaboration, both in creating the enabling environment and also in information-sharing. Many investors who might be willing to deploy capital into SDG companies and funds don’t actually know about those opportunities, and the fact that many are delivering market-rate returns. There’s still very much an information asymmetry, so there needs to be centralisation of those opportunities, whether that’s databases or platforms.

I’m not proposing a single platform. But there do need to be more efficient ways of connecting public- and private-sector actors to facilitate deals. Public-sector institutions can take some of the risk off the table for private-sector investors, but they’re not actually getting together and there are still only a small number of these collaborations that result in concrete deals. The key thing is there is appetite from government and development-finance institutions, public-sector agencies, philanthropists, impact investors—even large banks and ultra-high-net-worth clients—to do this.

The PRIs [Principles for Responsible Investment, a set of UN-backed principles that urge investors to factor in the environmental, social or governance aspects of their investments]—the initiative that I led—is an obvious candidate to help facilitate such a process. Some of the development finance institutions like the IFC along with some of the world’s largest banks have the ability to bring investors together with investable deals. People are willing to make these investments if they get structured.

EIU: How are developing countries, broadly, responding to the SDGs and what incentives might help boost buy-in in these regions to the SDGs?

James Gifford: It’s already heading in the right direction. Issues like pollution in China are so clearly material to that country’s prosperity that they’re driving a huge push in the direction of the SDGs.

I would go back to the point that there is no substitute for pricing externalities. We have to put a price on carbon as a global community. Certainly it would be inequitable to demand the poorest countries in the world pay the same amount as rich countries, but there does need to be a global price signal. The good news is that, given the speed of technology, it’s not going to be that hard. Relatively small pricing signals will result in tremendous outcomes and business and technology will respond very quickly. We just have to have the courage to do it.

EIU: What financial innovations are experimental today that have great potential to help boost action on curbing climate change or protecting the environment?

James Gifford: There’s certainly some innovation in the retail investment space, and I think the rise of equity crowdfunding for start-ups, where ordinary people can invest a couple of thousand dollars in start-ups to help solve problems or fund environmental technologies and so on, is really interesting.

There is also the rise of socially responsible robo-advisers that are automated online investment platforms, one of which allows retail investors to invest in long-term solar projects. These kinds of developments, where we’re getting very low-cost financial products for retail investments in climate solutions, is certainly something to watch.