Carbon-neutral assets are taking over finance
IFinancial flow can change like the weather, but investment in sustainability might be a change in climate
nvestment flows are often like weather patterns, erupting in sudden storms before shifting to new cycles. In economics and meteorology alike, an increase in the frequency of dramatic shocks is a sign that the overall climate may be changing.
It is no surprise, therefore, that investment bankers are starting to listen to meteorologists and climate scientists. The flood of investment into carbon neutral projects is becoming significant and long-term. Over the last year, the carbon-neutral asset class – or Ethical, Social and Governance (ESG), as it is known in investment jargon – has become a benchmark for money flows.
As the storm on the financial markets that has taken place in the last week has proved, there is little in the way of certainty in the face of natural forces such as pandemics, climate or conflict.
However long the current market gyrations last, the wall of money going into climate solutions is not going to be blown off course by this downturn.
The benefit of investing in these solutions – as with any technology – is that a kind of self-fulfilling prophecy comes into play. More resources unlock efficiencies or capturing “free” energy sources like solar or wind, which in turn makes future investment more worthwhile. This virtuous circle keeps advances in energy generation and consumption going.
In some areas, investors funding ESG-friendly debt have driven up the discount on borrowing rates over so-called “bad” investment grades to two percentage points. A survey by Deloitte has projected that ESG-classed investments will rise to $34 trillion by 2025, an almost two-fold increase on current levels.
That is a huge amount and dwarfs the $100 billion per year pledged by the world’s biggest economies to meet the 2030 climate targets set out in Paris Accord of 2015.
The world of finance has sat up and taken notice not only of the warnings, but also the opportunities.
On Thursday, outgoing Bank of England governor Mark Carney gathered the financial elite in the City of London to rally support for a “whole economy transition”.
Mr Carney argued that the choice at hand was not between funding green activity and blacklisting brown and black industries. Instead, he said, there were 50 shades of green investment that could get the world to net zero.
The Canadian superstar central banker is the special envoy on Climate Finance ahead of the COP 26 summit in the UK later this year. After he steps down, he is due to take up the role of the UN Secretary General’s envoy for climate action and finance.
In the months ahead, the pressure on the finance industry will not just come from winter storms in Europe or hurricane season in north America. Mr Carney pointed out that, according to an analysis of pension funds, the policies of companies are currently consistent with an expected climate warming of around 3.8 degrees. That is far above the 1.5 degrees that governments and citizens movements see as the threshold to disaster.
The impacts of an almost four-degree rise in temperatures includes a nine-metre rise in sea levels, affecting 700 million people.
It is no wonder the teenage campaigner Greta Thunberg can rally thousands of school children her own age to break school, as she did on Friday in the western English city of Bristol.
Her charge is that nothing is being done to stop the crisis, and the youth, she points out, cannot be silenced forever. If adults are acting like children with fingers in their ears, it falls on the young to act like adults.
Financiers would beg to differ. While there are deep pockets of political resistance to the message, there is also diplomatic-level progress.
The COP 26 conference takes place just days before the G20 meeting Riyadh in November. The organisers of both summits are already working to have a coordinated outcome. Despite the resistance of significant states like the US, India and China, there is the potential for Saudi Arabia and Britain to find a common platform for action.
The last climate summit in Madrid failed because of divisions over how to price carbon output. Whatever formula is reached, it is clear there will be a burden-sharing regime at some point.
The cheapest producers of the world’s carbon resources should be reassured that their lower impact output will not be penalised disproportionately. Meanwhile consumers will exert pressure to keep costs cheap.
The big calculation is therefore how technology and innovation address consumer and citizen concerns. For example, electricity generated by solar energy in intensely hot regions can now be used for round-the-clock consumption that is cheaper than any other source.
All is not lost for major states to follow youth demands for rapid change. Whatever resistance may come from Washington or elsewhere, the diplomatic calendar – from the annual UN General Assembly to the first G20 summit in the Arabian peninsula – revolves around this issue.
Investment opportunities drive the logic of rapid transformation. Thus technological benefits of the investment wave are leaching through daily life.
It may not seem like it, but from the boardroom to the classroom, a storm is brewing.