Capital for climate: The role of finance in saving our Earth

Capital for climate: The role of finance in saving our Earth

As we watched another Earth Day come and go, the global community's insufficient action on climate change became more disturbing than ever before. There is no issue that more urgently calls for innovation, collaboration, and investment than the climate crisis. Yet we continue to fall behind.

With 17 of the 19 warmest years on record occurring since 2001, and the last four years going down as the hottest since records began, the rise in temperatures shows no sign of abating and the consequent effects of climate change will only accelerate. As a growing portion of our planet becomes uninhabitable, the list of plant and animal species nearing extinction lengthens. As soon as 2040, we will breach the critical threshold of 1.5º C warming, leading to widespread coastal flooding, droughts, forest fires, food and water shortages, and poverty.

In the investment community, we should all be worried. If concerns about environmental degradation and sociopolitical impacts aren't compelling enough, the economic costs of climate change are significant. Warming of 1.5º C degrees is estimated to cause a $54trn blow to the global economy. The global financial markets will need to adapt to the estimated 200 million people displaced by climate change by the year 2050, straining the economies that will need to absorb a large influx of new people. Agricultural production will suffer in countries around the world and the risk of geopolitical conflict will soar.

As we grapple with the full weight of this crisis, we are witnessing another shift - one in the financial markets - that may prove to be a promising part of the solution. A growing number of investors are considering the social and environmental impact of their investments as critical to investment decision-making. Whether to mitigate risk, to meet client demand, or to fulfill a sense of responsibility to their communities and the planet, many investment firms are shifting assets to responsible investment approaches. Global sustainable investing assets reached $30trn in 2018, a 34% increase from 2016.

What does this mean for climate change? It means less money fueling environmentally destructive companies and more money invested in those focused on more sustainable business practices.

The bulk of the activity in responsible investing has been in environmental, social, and governance (ESG) strategies, as they can be applied throughout the portfolio and a growing body of research has demonstrated the financial materiality of ESG criteria. These criteria range a company's carbon footprint, to the quality and transparency of its labor practices, to the diversity of its workforce. Asset managers have created a wide range of ESG products that can meet the size, return, and risk management needs of institutional and retail investors.

It is encouraging to see that ESG investing has become widely accepted. Yet, while the "E" in ESG investing is an effective tool for screening out companies with negative environmental externalities and optimizing for companies with better environmental policies and performance, ESG alone will not be able to deliver the transformative solutions required to halt climate change and fuel a greener economy. For this reason, a growing number of investors are taking a step further and allocating assets using an investment approach that actively invests in projects, companies, and funds, that address environmental challenges - impact investing.

Impact investments are investments that seek a measurable social or environmental impact alongside a financial return. To further tackle climate change and invest in the sustainable economy of the future, impact investors are investing in companies that are producing renewable energy, developing green technologies, sustainably managing forests, or applying innovative business models that combat climate degradation. They are providing investment opportunities to the growing number of people who are interested in pulling their assets from investments that are part of the problem and allocating them to businesses that are generating solutions.

At the Global Impact Investing Network, we see a growing number of these investors each year - those that are looking at how to better understand and improve the environmental impact of their portfolio. Almost 75% of the investors who responded to our 2018 Annual Impact Investor Survey said they are seeking to address climate change through their investments, and many have launched dedicated vehicles within the past couple of years.

These investors are indeed motivated by climate concerns, but many also see this as just smart business. Investing without regard for social and environmental effects has contributed to the climate crisis we find ourselves in the midst of today. No doubt, we are already seeing a transformation in how companies need to do business in this new world—a world where we have better information about the effects of business decisions on the planet. And how investors adapt and own their role in building a sustainable economy for the future—or not—will likely be a key indicator of whether they too will thrive or face extinction.


Amit Bouri is CEO of the Global Impact Investing Network