The time is now for sustainable investing
The time is now for sustainable investing. It is no longer an investment approach that is pursued by niche, ethical or impact investors. Sustainable investing is going mainstream. But, with the world facing unprecedented challenges such as irreversible climate change and massive environmental degradation, we need much more. And, for that, we need strong policy action. Industry action is critical but we cannot rely on a market-led transformation alone – it must also be policy-led.
Leadership from within the industry
The good news is that we are beginning to see real leadership from a broad range of investors, particularly on the need to drive substantial capital towards addressing climate change challenges. As a recent example, an industry-led statement on climate change has been signed by over 370 leading institutional investors, representing assets of over US$24trillion . Through this statement, institutional investors are calling for stronger political leadership and for the more ambitious policies urgently needed in order for climate investments to be scaled up. This commitment by major investors is highly significant.
Investors are part of the solution
Smart investors can and will be at the heart of change, not least because of a growing awareness that they are facing the prospect of significant losses and erosion of value from climate change and environmental damage. At the conservative end, the Economist Intelligence Unit recently calculated that the resulting expected losses from climate change to the current stock of manageable assets in discounted, present value terms are valued at US$4.2trn, roughly on a par with the total value of all the world’s listed oil and gas companies or Japan’s entire GDP (Economist Intelligence Unit, 2015). Warming of 6 degrees Celsius could lead to a present value loss of US$13.8trn, representing roughly 10% of global total assets.
But investors recognize that this is not only about risk management and likely value erosion. There are widespread opportunities associated with low carbon and climate resilient growth, many of which are clearly profitable, particularly in sectors focused on resource management, energy efficiency, green infrastructure and buildings. And solving the energy conundrum is at the core of sustainable growth, particularly in emerging markets. In Asia alone, a massive investment of US$3.6tn is needed to equip the region with the power capacity needed by 2030. Two thirds of that sum will be spent on renewable generation technologies such as wind, solar and hydro-electric . The market potential is huge and obvious.
Significant investment is required to finance the low carbon transition
Despite the rationale behind why climate investment makes sense, much more is needed: a significant shift in investment patterns and a scale-up in investment volume are required to meet climate and energy goals. These goals can only be achieved if governments create conducive investment environments through appropriate incentives and mechanisms to facilitate private sector engagement and capital flows.
Policy makers must support the transition
Policy emphasis should be placed on supporting the development and deployment of renewable energy and energy efficiency technologies in parallel with measures to reduce fossil fuel dependencies. Redirecting subsidies and adopting other mechanisms, such as fiscal measures, that support the adoption of climate friendly technologies are to be encouraged. Carbon pricing is also crucial to addressing climate change. The longer governments do not take action on tackling this market failure, the longer institutional investors will be unable to accurately price in the risks.
Similarly, disincentives are needed to avoid, reduce and manage polluting industries and land use conversion – particularly of tropical peat land forest. Care needs to be taken to ensure that climate resilient infrastructure and large-scale renewable energy projects are developed with appropriate environmental and social safeguards in place, these ideally being considered during strategic land use planning to ensure that any anticipated significant adverse impacts on sensitive receivers, including existing community users, can either be avoided or satisfactorily addressed well in advance of any physical development.
Investing sustainably is going mainstream in part because there is a growing awareness of the massive risks of not doing so. Examples such as major pension and endowment funds divesting out of fossil fuel companies and of the soaring demand for environmental, social and governance (ESG) funds are evidence of this.
But strong policy is needed to create a basis for investors to seek out opportunities that have a production and consumption profile more aligned with low carbon, low pollution, and resource efficient growth. Against the backdrop of international climate negotiations, investors can and will play their part in building a sustainable future. But so too must governments.