Six years. That’s how much time society has to avert the worst impacts of a warming planet. Between now and 2030, global emissions of carbon dioxide and other greenhouse gases would need to fall by 43%, science tells us. (Emissions would need to peak by next year.)
Over that time, society would triple renewable sources of energy, double gains in energy efficiency, cut methane emissions substantially, and accelerate the transition away from fossil fuels. All are efforts that nearly 200 countries agreed to contribute to at the COP28 climate conference last December, which concluded the hottest calendar year on record.
If you work in sustainable finance like I do, you may have had family and friends ask you what these commitments mean for them as consumers, producers and savers in our economy. How might global climate goals inform decisions about aligning their money with their values or protecting the value of their investments?
As such questions suggest, it’s not just big investors like pension funds and sovereign wealth funds who are paying attention. The shift to a clean-energy economy shapes how investors of all sizes view opportunity and risk, not to mention the future of life on Earth.
As it happens, every investor can learn from the experience of the largest financial institutions, which allocate trillions of dollars across global capital markets and increasingly integrate climate considerations into their investment decisions. Many have publicly committed to accelerate the transition towards an economy that adds no new emissions to the atmosphere.
It is an enormous undertaking. Annual clean-energy investment would need to more than double from its current record high to roughly US$4.5 trillion ($6 trillion) by the early 2030s.
See also: A US$12 bil climate fund is readying a rare bond issuance
While a share of that capital will come from governments, much of it will come from the private sector. Institutional investors differ from you and me in their scale, but their learnings may inform how all of us approach climate investing. Here are some that I have shared with my circle.
A net-zero economy means the whole economy
Renewables are the easy part of the story. Risk-minded investors have learned that reaching net-zero will also entail investing in industries that contribute an outsized share of the nearly 60 billion metric tons of greenhouse gas emissions that society put into the atmosphere last year.
That means providing capital to companies in industries such as steel, cement, concrete, chemicals, aviation and shipping, which together contribute nearly one-third of global greenhouse gas emissions and without which the global economy cannot function. Investors have learned to identify companies in each of those industries that are leaning in, through investment and action, to decarbonisation.
See also: India aiming to finalise carbon deals with Japan, Singapore
Better to invest than divest
Gone are the days when investors who wanted to green their portfolios sold the stocks of oil and gas companies, an act which unburdens portfolios but does little to lower emissions in the physical economy.
Starving companies of capital may not have the intended consequences. A paper by Jonathan Berk, a professor of finance at Stanford, and Jules H van Binsbergen, a professor of finance at Wharton, finds that the choice by shareholders to sell shares in companies that pollute cannot meaningfully impact the price such companies pay for capital because there are simply not enough impact investors as a share of investable wealth.
Research by Jacquelyn Pless, an assistant professor at the Massachusetts Institute of Technology, finds that by investing in pollution-intensive industries, investors can actually promote climate-friendly innovation by using their voice to influence companies’ activities and shape their strategies.
That’s not to suggest there was never a time when it might make sense to avoid the stocks of carbon-intensive companies. Institutional investors, for example, may choose to withhold investment from companies that are building new coal-fired power plants, which produce one-fifth of global greenhouse gas emissions, while supporting utilities that are taking steps to decommission existing coal plants before the end of their useful lives.
Look forward, not backward
The largest investors have learned that if they do not know companies’ emissions, they do not know the climate risk involved. While measuring companies’ carbon footprints can reveal their impact on the climate currently, the transition to a cleaner global economy will turn on our ability to extrapolate companies’ projected emissions from the credibility of their climate action and stated goals.
A credible corporate climate target, the largest investors know, sets out concrete steps to reach net-zero in line with science, encompasses all financially relevant emissions, and includes interim milestones the company aims to achieve. Just 20% of listed companies have targets that meet those criteria.
Companies with credible targets also publish plans detailing how they will achieve them, how they will enlist suppliers in the effort, and how they will align their governance and lobbying accordingly.
Capital has a critical role to play if we hope to stop climate change, but preventing the costliest warming will mean greening the global economy much faster than business as usual. With the power of investors of all sizes targeting decarbonisation in every industry, we can drive towards a new era of sustainable growth.
Linda-Eling Lee is founding director and head of the MSCI Sustainability Institute
