Investment against climate change

Climate change is the major problem of our time. Numerous organisations and many governments are taking action. But there's also a need to rethink business and investment.

In 2018, the Intergovernmental Panel on Climate Change (IPCC) published a widely acclaimed report on climate change entitled Global Warming of 1.5ºC. [1]

The name says it all: it is estimated that humans have already caused over 1°C in warming over the last 150 years. 1 degree? That may not sound like much at first, but globally, the impact has been drastic: natural disasters caused more than $165 billion in damage in 2018 alone. The financial world, too, must now begin asking: What measures need to be taken to stop this change?

Policymakers were the first to provide answers. The Paris Agreement of 2015 remains a key point of reference. [2] It calls for a dramatic global response, with three main objectives: mitigating climate change, adapting to the negative effects of climate change, and (this is where it gets interesting) aligning financial flows to match a move towards lower greenhouse gas emissions.

Let's focus on this last point. The Paris Agreement generated worldwide media coverage, and there was some initial reaction from investors. Leading institutional investors chose to incorporate climate change into their investment decisions.

So how does one integrate a natural phenomenon into financial calculations?

There are two possible options: one can reduce exposure to the financial risks of climate change; or one can make targeted investments in special, sustainable financial instruments.

The key is always the same. By analysing the risks of climate change at the portfolio level, one can achieve stable long-term returns. This also motivates investors who are not pursuing an environmental agenda to invest in the future.

A good example of this is the Portfolio Decarbonization Coalition, [3] which has 32 investors with assets in excess of $800 billion. It aims to reduce their exposure to greenhouse gas emissions. Further positive examples were not long in coming: in November 2019, the Swedish central bank sold its bonds in Western Australia and Queensland on the grounds that greenhouse gas emissions there had reached worrying proportions. [4]

Investment or sale as a new way to apply pressure in the fight against climate change. This is another way of accelerating the necessary changes.

Investing in special sustainable financial instruments is also very popular. According to the Global Sustainable Investment Alliance, the Global Sustainable Investing Assets portfolio grew 126% from 2010 to 2018, to $30.7 trillion. [5]

Investments in green bonds continue to support capital spending by private and public institutions, while also financing global climate protection goals. These developments are encouraging. But they are only a first step. A holistic approach is needed on the world market and on an institutional level. Current standards make it difficult for investors to see whether their investment is really helping to achieve the goals of the Paris Agreement.

At the institutional level, most initiatives, such as Climate Action 100+, focus on selecting issuers who will work towards achieving individual goals of the Paris Agreement, rather than those that will work towards all three.

One solution for this could be the Climate Change Investment Framework. This instrument provides investors with a tool that can evaluate an investment in terms of the financial risks and opportunities associated with climate change. The three goals of the Paris Agreement are translated into fundamental measures, the progress of which can be tracked in numbers.

Instruments like these can make a decisive contribution towards supporting investors and market analysts in integrating climate-related issues more systematically and holistically into their investment decisions. This makes green investing that much easier.

The fact that the global financial world is developing in the direction of green investments makes one thing clear: in the future, companies and nations will have to orient themselves in a much more ecological direction in order to receive financing. This development is positive – for investors and for our planet.