Investors play key role in addressing climate change
“The goal of decarbonizing our society is necessary and urgent. It will require ingenuity, but it will also require investment,” said Columbia Climate Institute founding dean Alex Halliday At an event in late March. The event discussion and highlights, “Financing the Future: Investors and the Climate Crisis,” illustrate the importance and relevance of the Earth Day 2023 theme, “invest in our planet“
Hosted by Halliday, Sustainable Investing Expert caroline flamer and investors Bruce Arthur shared their insights. Flammer is a professor at the Climate Institute and Columbia University’s School of International and Public Affairs. Usher is a faculty member at the Climate Institute and co-director of the Tamer Center for Social Enterprise at Columbia Business School.
The tools to wean our society off fossil fuels already exist, but will require significant investment to scale up; a total of $100-200 trillion may be needed over the next 30 years to achieve net zero emissions. While those numbers may seem daunting, Usher says it boils down to about $3-6 trillion a year, a fraction of today’s global capital markets, which are more than $100 trillion in size.
Business opportunity
Usher and Flammer argue that investing in climate change solutions can pay off for individual investors and companies alike.
As an investor and former CEO of a company working on projects to reduce emissions in developing countries, Usher focuses on opportunities on a personal level.
“Tackling climate change is causing massive changes in how we invest capital, where we invest it, and the opportunities that come with it,” he said. “As an investor, change is what creates opportunity. Change enables people to invest in new and exciting areas.”
Arthur said he saw the most promising investment opportunities in wind energy, solar energy and electric vehicles. These are already cost-competitive and a better product than alternatives, he said. Batteries and other energy storage technologies, as they are close to cost-competitive, are another promising area of investment. at last, green hydrogen Direct air capture of carbon — while not yet cost-effective — is “very exciting,” he says.
Flammer’s focus is broader, looking at company-level benefits. In her research, she has found that socially and environmentally responsible practices can improve a company’s competitiveness, innovation and shareholder returns, in addition to improving employee satisfaction and talent retention.
decarbonization investment
While Flammer believes government regulation is the best way to move our society away from fossil fuels, she points out that investment can also play an important role in the decarbonization process. She said the government’s action was “not enough”. “This puts pressure on the private sector; what and to what extent can the private sector help mitigate these major societal challenges, including climate change?”
Flammer warns that divestment — the sale of investments tied to fossil fuel companies — may not be the strongest move an investor can take because while they may be cleaning out their own portfolios, they’re simply transferring those investments to someone else . A more forceful approach, she suggested, would be for shareholders to put pressure on the companies to clean up their business practices.
“Additionally, investors can engage with policymakers to try to trigger systemic change,” Flammer said.
Usher, by contrast, prioritizes private sector investment over government mandates in driving decarbonisation. That’s because, according to Usher, private investment is better at driving innovation and scaling solutions. He argued that the government’s role should be to provide subsidies to trigger private sector investment and “pave the way for innovation and scale”.
The risk of greenwashing
Both experts cautioned against “greenwashing” in the investment world.
“You can see a lot of companies making promises and not delivering on those promises,” Usher said. “That’s because all reporting is voluntary. There’s chaos out there.”
US Securities and Exchange Commission (SEC) In consideration A rule that requires companies to disclose their greenhouse gas emissions and climate-related risks to investors. “It would be a major improvement,” Flammer said, but she cautioned that companies could still find workarounds.
The problem with the SEC proposal, she explained, is that it would only require companies to report greenhouse gas emissions from sources they directly own or operate, as well as emissions from their use of electricity, steam, heat or cooling. The proposal excludes indirect “Scope 3” emissions, that is, emissions from other parts of the value chain that the company does not own. For example, emissions to manufacture components that companies buy and use in their products, or emissions from the disposal of finished products when they are no longer useful.
Flammer’s concern is that if Scope 3 emissions are not included in the SEC proposal, the company could outsource its more emissions-intensive operations to convert them to Scope 3 emissions. In other words, Flammer said, “it looks like they’ve cleaned up their act, but nothing has changed because they’ve offloaded the emissions to someone else.”
Prime Time for Green Investing
Why is now the right time to invest in climate change solutions?
On the one hand, “there’s a lot to invest in,” Usher said. Since he started in the field 20 years ago, solar power has grown almost exponentially, and many other solutions have become commercially competitive. There has also been a cultural shift, Usher said: “Consumers want to buy more sustainable products.”
A chart showing the rapid growth in solar power generation over the past decade or so, and forecasts for 2030. source: International Energy Agency
“The trend is clear: fossil fuels are being replaced by renewables,” Arthur said. “The hard part is figuring out which companies will win. Will you be the next Tesla, or the next Kodak? It’s hard to predict.”
To avoid the worst effects of climate change, the world needs to wean itself off fossil fuels quickly. It’s a daunting task that requires all the tools we have, including smart investments.
A strong sign of progress, Usher noted, is that some countries have managed to decouple economic growth from carbon emissions. This includes the United States, whose emissions peaked in 2007 but which has still managed to post strong economic growth in the years since. Such an achievement would not have been possible 20 years ago, Usher said.
There is still a long way to go to reduce emissions to zero within the next 30 years, but Usher is pragmatically optimistic:
“We have the solutions to decarbonize. We have the capital to decarbonize. I think we need to recognize that and then get to work and implement those solutions.”
