This blog first appeared in Environmental Finance.
The past few years have been a doozy for investors when it comes to climate. Big commitments have come hard and fast. Net Zero commitments. Divestment commitments. Green solutions commitments. But in the real world, it seems these changes aren’t galvanising the changes that people hoped for. Perhaps when it comes to climate, the road to hell is paved with good intentions.
Here are three things I believe we need if we really want to drive the energy transition while capitalising on the investment opportunity it represents:
1. Fewer scarecrows, more tin men
Sustainable investing often suffers from what I think of as scarecrow syndrome: too much heart, not enough brain power. Climate change is one of the most complex intellectual challenges that we could ever conceive of: a global economy powered by fossil fuels faces destruction by the very thing it is built upon.
Scientists and economists who dedicate their lives to understanding climate change can’t agree on how fast or slow this destruction will happen because of gaping uncertainties over tipping points, reliance on imperfect models without any alternative, a changing political environment, the list goes on.
Investors need to be humble in the face of this. Investors who believe climate is touchy-feely hippy-dippy stuff need to be humble. I wish it was! If anything, I believe we need more traditional financial analysts and investors to take those brains and apply them because we might finally understand the depth of climate risk in portfolios today and find ways to tackle them.
Moreso, the investors who care deeply about climate change but don’t take the time to understand the complexity of the issue and review the realities of their choices need to be humble. Just because something feels good, it doesn’t always make it a good investment decision for your client or the world.
2. Recognise that transition investing does not equal ethical investing
Part of the challenge for investors when it comes to climate investing can be that they assume that because it feels like the right thing to do, it needs to look and feel like good old fashioned ethical investing.
But climate investing cannot and should not mimic the practices of ethical investing. Ethical investing is about individual choice to support or not support an activity, like tobacco or alcohol. All investors have that right.
But investing to transform an energy system is inherently different. Greenwheel research[1] into divestment has shown that when it comes to public equities, divestment has not moved the needle despite huge sums of money being withdrawn by large asset owners and managers. If anything, I think there are signs that if climate-minded investors sell up, the remaining shareholders who don’t care about the energy transition have more influence over company strategy.
Instead, we need to identify ways as an investor community to influence heavy emitting companies to transition effectively. Structured engagement focus and responsible shareholder coordination is the first step. It is tougher, it is likely to be rocky and we cannot know for certain it will work. But we know that divestment has not yet worked and in the midst of a climate crisis, we don’t have time to waste on actions that don’t work.
We also need to stop talking about climate investing as if it only means niche, tech-focused investing. The nuts and bolts of investing in the energy transition tend to be in the less flashy stuff: in the buildout of electricity capacity and distribution to support a massive ramp up in energy demand from datacentres; in the generation of energy from renewables and source materials required; and in efficiency gains across the economy that allow us to do more with what we have. Opening up the definition of investing for the transition makes it both more accurate to the realities of climate change and broadens the range of investment styles and approaches that can invest for the transition.
3. Adapt or fail. Seriously.
If there is one thing 2024 should have taught us all, it is that climate change is here and its effects are deadly. 2024 was likely the warmest year on record.[2] All year, news reports covered harrowing climate-related disasters across the world, with no continent spared. The 10 most costly of these resulted in $229bn in damages and killed 2000 people.[3]
Talking about investing in adaptation to this warmer world is not giving up on the transition. It is recognising where we are already and the inevitable need to adapt. It is the responsible thing to do for our clients and for our society. Indeed, while not true of all adaptation investments, Greenwheel research last year[4] found that many adaptation solutions can have mitigation co-benefits.
From an investing perspective, adaptation is a structural theme like the emerging consumer or demographic change. Economies across the world will need to adapt to this warmer, more chaotic world. Solutions that allow economies to keep functioning, that allow people to keep working and socialising and, frankly, living will be in great demand. The investors who pay attention to this can identify return-generating opportunities that allow diversification from standard climate investing and that are less reliant on a theoretical future world than many technology solutions.
Sources:
[1] redwheel-uk-climate-engagement-primer.pdf
[2] https://wmo.int/news/media-centre/2024-track-be-hottest-year-record-warming-temporarily-hits-15degc#:~:text=2024%20is%20on%20track%20to,temporarily%20hits%201.5%C2%B0C
[3] https://www.theguardian.com/environment/2024/dec/30/2024s-most-costly-climate-disasters-killed-2000-people-and-caused-229bn-in-damages-data-shows
[4] https://www.redwheel.com/uk/en/institutional/insights/greenwheel-climate-adaptation-theory-of-change/
Key Information
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Past performance is not a guide to future results. The prices of investments and income from them may fall as well as rise and an investor’s investment is subject to potential loss, in whole or in part. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of Redwheel. This article does not constitute investment advice and the information shown is for illustrative purposes only.
