Investing and the climate
The pandemic has foregrounded the importance of environmental sustainability, especially through the supply chain. ESG was already hot and COP26 seemed to supercharged interest. But not without accusations of being little more than a box-ticking exercise that enables ‘greenwashing’.
ENVIRONMENTAL CREDIT CRUNCH
Rising populations, living standards, urbanisation, globalisation, and COVID-19 have all had major impacts on global demand/ supply of resources. But climate change will intensify the pressure on resource allocation the most, potentially leading to huge social and economic costs.
Our current standard of living and overall level of consumption is unsustainable with our planet’s finite natural resources. As global citizens, consumers, investors, and stewards of the Earth, we have the power to shape a more sustainable path that will allow us to continue to evolve our quality of life while preserving our planet for the next generation. It’s important to consider how investing in the climate and future of our planet can yield financial benefits, not just social or environmental.
The world is moving towards sustainable economic models which could create opportunities worth $12 trillion a year. According to Refinitiv data, investor interest in sustainable assets increased 34% in 2020 alone.
GREEN BUILDING OPPORTUNITY
The buildings and construction sector alone represents more than 50% of global wealth. The sector also offers one of the most cost-effective and economically beneficial paths for reducing energy demand and associated emissions while supporting adaptation and resilience. Sustainable building investment represents one of the biggest global investment opportunities – an estimated $24.7 trillion by 2030.
“Green buildings are among the biggest investment opportunities at $24.7 trillion globally”
SUSTAINABILITY IS COMMERCIALLY VIABLE
The idea that commerciality and sustainability might be in opposition to one another is simply no longer the case. More and more we’ve seen that when you embed principles of sustainability into your business strategy it’s going to set up your business for more success and more competitiveness in the future as we enter this next generation low carbon economy. There are a number of benefits for a business to engage in environmentally responsible actions:
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Reduced operational costs
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Better engagement from staff
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Higher credibility from customers
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Improved image and credibility from key stakeholders
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Improved relationships with the local community.
STANDARD-SETTING WILL BE KEY
The labels currently attached to green financial products and investments, whether green bonds or mortgages, can be fairly liberally used and Institutional investors have become more demanding. It’s become more important to standardise the presentation of sustainability reports and one of the more notable outcomes from COP is the move towards ‘Common Metrics and Consistent Reporting of Sustainable Value Creation. A core set of common metrics and disclosures on non-financial factors for investors. These metrics would include criteria for ethical behaviour, diversity and inclusion, water consumption, job security, innovation, wage equity, anti-corruption, and greenhouse gas emissions, among others.
NOBODY LIKES REGULATION, BUT…
Regulators are starting to focus on climate change risks and sustainable finance. Whether that’s mitigating the risk of physical disasters – which could threaten financial stability – or the need for better disclosures and stress testing by financial firms to help preserve/adapt financial stability.
Investing in the climate means that environmental rules will increase for their organisations over the next five years. But there has been little change in how UK businesses feel in terms of their preparedness, something that could be seen to be surprising in the context of the Covid-19 pandemic. They are also looking to the government for incentives that would enable them to increase their environmentally responsible programmes. For investors, a lack of standardisation makes comparisons difficult, while measurement and reporting remains heavily focused on the ‘e’ (environment), rather than ‘s’ (social) or ‘g’ (governance)
HORIZON SCANNING: CRYSTAL BALL TIME
Looking further down the horizon, the UK is continuing to become more and more sustainable. Sustainable buildings, designed with eco-efficiency in mind, are becoming the norm. Architects, engineers, and planners have been focusing on reducing environmental impacts and improving energy efficiency. Now is the time to seek opportunities position for structural growth, and go sustainable. It’s never been more important to develop a clear investment strategy and allocate adequate resources.
