Climate crisis: investors have a key role to play in shift to green finance

Global summits and national targets to reduce carbon emissions are gathering momentum with the mobilisation of capital in support
Investors have the techniques and data today to make the right call when it comes to having a climate-aware portfolio

Chris Iggo

Published: 2:30pm, 5 May 2021

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The US-hosted Leaders Summit on Climate marked a significant milestone on the road to the UN Climate Change Conference to be held in Glasgow, in the UK, this November. It also marked the return of the United States to the forefront of meeting the challenges of climate change.

The Biden presidency set a new target to reduce greenhouse gases by 50-52 per cent, compared to 2005 levels, by 2030. More countries are likely to restate their national carbon emissions reduction targets ahead of the Glasgow summit, and more international collaboration will be seen to mobilise the corporate and financial sectors to contribute to the fight.

Investors have a key role to play. Capital can be allocated to encourage activities with high carbon footprints to reduce them over time and to support new technologies and businesses that offer solutions to climate change and the preservation of the biosphere.

This is already happening at pace, as shown by the rapid growth in the issuance of green bonds – bonds that raise money to finance activities that make a positive contribution to the environment – and the emergence of climate-focused investment strategies.

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Achieving a net zero carbon economy in the decades ahead is the unifying goal for governments and the private sector. Failing to do so and allowing global warming to trigger extreme weather events, flooding and droughts will increasingly undermine the global economy and lead to humanitarian catastrophes.

Rising living standards and global economic growth can only be sustained if countries set out and stick to plans to reduce emissions and limit the rise in global temperatures. Indeed, the transition to a low-carbon economy can boost future growth.

First, there is a huge amount of investment needed to replace fossil fuels as the primary source of energy in a range of economic activities – energy generation, transport, agriculture and industrial processes. That investment will create jobs and boost growth. It will also provide investors with opportunities to profit from new technologies across the energy value chain.

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Second, renewable energy might turn out to be cheaper and less volatile than traditional power. This could benefit household incomes in real terms, make companies more productive and allow energy generation to occur closer to points of consumption.

The shift to wind and solar power, among other renewable energy sources, will reduce external costs (pollution) and contribute to the circular economy. The need to “capture” carbon should also encourage better land use and care for the biosphere. Forestation and preservation of coastal mangrove swamps, for example, can help reduce carbon dioxide levels in the atmosphere.

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Finally, the widespread deployment of renewable energy will massively reduce the dependence on oil, gas and coal. While these natural resources are found in multiple locations, they do not occur everywhere. Some countries have historically been energy poor and have needed to import energy, often at the expense of balance of payments stability.

Solar and wind resources are widespread. Given the appropriate investment, countries that have never had oil or coal could find themselves with abundant energy potential.

Chile, for example, is well placed to exploit solar power. It plans to utilise solar energy in the production of “green hydrogen”, which has tremendous potential as a power source for transport, home heating and industrial processes. Renewable energy could help transform economies, helping redress inequalities in economic power and wealth across the world.

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Investors can contribute to this process today. More investment managers now offer low-carbon strategies. These take many forms, including some that focus on excluding high carbon-dioxide emitters and those that focus on companies leading the move to net zero and the technologies that will enable the transition.

When one hears of oil companies striving to reduce their carbon footprint and investing in alternative energy, we can be sure the journey is now well advanced. Investors have the techniques and data to make the right call when it comes to having a climate-aware portfolio.

Understanding how firms are adapting their business models and allocating capital appropriately should allow investors to reduce their exposure to risks (regulation and taxes related to carbon emissions) and benefit from the growth opportunities provided by new climate solutions.

Chris Iggo is the chief investment officer for core investments with AXA Investment Managers

This article appeared in the South China Morning Post print edition as: Investors have vital role to play in shift to green finance

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