Business leaders and institutional investors need to wholeheartedly commit to transformative actions where financial returns and societal benefits are not at odds but mutually reinforcing.
We have become desensitised to the plethora of alarming statistics around all-things climate change. Extreme weather, climate and water-related events caused nearly 12,000 reported disasters between 1970 and 2021, with just over two million deaths and $4.3trn in economic losses, according to the World Meteorological Organization,
And yet, global financing for climate action reached just $803bn annually for 2019 to 2020 – less than a fifth of the estimated $4trn in annual investment that is needed for public and private sector entities to meet net-zero objectives, according to UN Climate Change.
The response to climate change will require accelerated efforts across the entire world to meet commitments made under the Paris Agreement and related processes. In addition to making good on these pledges, governments and businesses working together to partner with local communities and suppliers, and create intentional space for diverse leadership, will bring many benefits.
In order to scale successful models and efforts, we need a reformed financial system that is driven by a commitment to sustainability and climate resilience alongside profit. Global capital markets – with at least $100trn in assets under management – have the resources to contribute the financial capital needed for this transition, limit global warming to 1.5°C and create a more sustainable global economy.
How can this be achieved?
For starters, institutional investors, asset owners and managers need to reconsider their investment strategies and risk assessment approaches.
Climate risk, along with the long-term costs associated with climate change, should be integral to their calculations. Corporations, especially those across high-emission industries, need to redirect their budgets and adopt sustainability-driven approaches. Those who excel in this transformation will not only reduce risk but also discover new market segments and opportunities, ultimately bolstering investor returns. For example, Deloitte estimates that more proactive investments in climate adaptation and mitigation today could add $43trn to the global economy over the next five decades.
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By GlobalDataThis is why we have seen some asset owners such as AXA Investment Managers directly invest $49m in Brazilian-based Mombak to increase the amount of carbon dioxide captured from the Amazonian atmosphere (while also reforesting parts of the Amazon basin).
Professional investment managers like Fidelity International are developing and implementing a set of proactive strategies, including portfolio structuring, that would actively promote decarbonisation and climate-friendly strategies among companies. Influencing investment timelines to turn dollars into long-term and beneficial impacts is at the heart of the Time Value of Carbon framework by Generation Impact Management.
However, the reality remains that the 45 largest asset managers in the world (which collectively control assets worth more than $70trn) are failing to meet their net-zero targets. We continue to hear about environmental, social and governance (ESG)-related assets under management growing to $34trn by 2026 — yet these numbers are not translating into capital being utilised in real, material ways that will chart a new and sustainable course for our economy. Furthermore, 85% of the world’s population lives in emerging economies. Any effective solutions must extend beyond wealthy advanced economies.
Bringing the right mix of people together
Given the lack of adequate investment in response to climate change – both mitigation and adaptation – it is imperative that we find effective ways to stimulate action at scale, and in both the productive and financial sectors. By educating financial decision makers, they can consider broader and longer-term investment opportunities across the risk, return and impact spectrum.
To do this, we need convening power that brings together those seeking financial capital with those deploying financial resources and fuelling innovations and solutions globally. The Green Climate Fund and the emergence of the Loss and Damage Fund (an outcome of the COP27 UN climate change conference) are examples of what is possible when we merge different streams of capital for real progress, but even these vehicles have too much risk aversion and long, bureaucratic systems backed into their decision making.
The Triple B Framework makes the case for focusing on action by strengthening ecosystems and facilitating activators ranging from the Federal government, non-profits, coalitions, think tanks, academics and individual scholars.
Developed by the team at Resilience Capital Ventures (RVC), the framework involves combining non-financial forms of capital with finance to create value. RVC’s work has shown that by sequencing injections of knowledge, social and political capital first, societies can get more bang for their buck. This also works to improve the discovery of financial capital from non-traditional sources such as credit unions.
However, with an estimated $5trn on corporate balance sheets in the US alone, corporations need to play a more substantial role in climate action too. Collaborative efforts, like this playbook developed by the Global Business Coalition for Education with Lebec Consulting, can effectively connect specific issues such as education with material ESG concerns. This playbook provides a concrete road map that is scalable, replicable and promises to transform the way companies use their capital and deliver on objectives for all stakeholders.
These playbooks and conceptual frameworks work well because they address the root causes of underinvestment and misallocation.
A clear road map ahead
Moving forward, we see three concrete actions that leaders, corporations, institutional asset owners and managers, and portfolio managers can take – and they will require leveraging the concepts, frameworks, mindset shifts and partnerships mentioned in this article.
One, undertake change management that shifts companies’ objectives towards full value creation and away from narrow profit maximisation to promote human thriving and planetary stewardship. These efforts will be enhanced when leadership teams are more diverse and worldviews are expanded.
Two, improve risk identification and measurement by embedding the real cost of carbon and climate change into asset valuation and capital budgeting. These technical changes by corporations and institutional investors should include adopting globally standardised and best-in-class ESG ratings and scores that reflect a company’s efforts in addressing double materiality. When information is more readily available and standardised, the layers of decision-making in corporations and investment houses can embrace change. This is crucial for the bottom line and resiliency.
Three, portfolio managers and capital market professionals should design indexes and portfolios that enable both institutional and retail investors to choose companies that are genuinely addressing poly-crisis issues and adapting their business models accordingly.
In sum, business leaders and institutional investors need to wholeheartedly commit to transformative actions that push them beyond their current comfort zones and industry norms, leading to a new paradigm where financial returns and societal benefits are not at odds but mutually reinforcing. We all stand to benefit.
