Climate Change: An environmental disaster and an economic time bomb

There are currently no vaccines in production for climate change, although, if left disregarded, the global population will most likely see more harm from climate change, than COVID-19. While the world’s attention, justifiably, remains on COVID-19, climate change remains an existential threat, that must be addressed with the same urgency.

Climate change attracts very little attention mainly due to its invisible nature and because it has, mostly, so far, affected the poor. Governments and business leaders worldwide are failing to stop the planet from turning uninhabitable for millions of people, if not billions. More than 1.2 million lives have been lost and it has cost the global economy some $3 trillion.

Five years ago, in Paris, world leaders promised to limit the rise in global temperature to 1.5°C (2.7°F) as much as possible. The stakes are high, and time is running out. While the Paris Agreement and the Sustainable Development Goals (SDGs) in 2015 have set a global sustainability movement in motion, many leaders have not delivered on their promises to tackle climate change and to manage risk. Transition to a low-carbon economy requires a paradigm shift across all levels.

China, the world’s largest polluter (28% of the global pollution) has promised carbon neutrality by 2060. The United States, the world’s 2nd largest polluter, has pledged to immediately return to the Paris agreement under Joe Biden. Assuming that the United States adopts a similar goal, warming could be held to 2.1°C by 2100 according to the research network Climate Action Tracker. Suddenly the targets of the Paris agreement are in sight.

There is some good news, however. A recent survey by Morgan Stanley found that 85% of individual investors and 95% of millennials prefer sustainable investment options5. On the institutional side, large investors such as BlackRock, CalPERS and CalSTRS have definitely tried to wield a bigger stick against corporate polluters and have successfully promoted change.

Shifting to a low-carbon economy could bring $26 trillion worth of economic opportunities by 20303. In comparison, climate inaction could cost economies up to $60 trillion4.

How can investors contribute to climate action?

Mitigate climate change-related risks

Stringent carbon regulations, declining fossil fuel demand and adverse weather events can make oil and gas assets obsolete. CalPERS, the nation’s largest public pension fund says its energy stocks, comprising 8% of its $400 billion equity portfolio, are at the risk of becoming ‘stranded’7. Stranded assets are something – a piece of equipment or a resource for example – that once had value or produced income, but no longer does, usually due to some kind of external change, such as changes in technology, markets or climate change.

Institutional and individual investors alike, can promote better corporate governance and climate change policies. Proxy voting, shareholder resolutions, engagements and meaningful activism are a few ways to drive change and climate-proof portfolios in the long-term. In the 2020 proxy season, climate change was the central focus of more than 77% of environment-related shareholder proposals9. In 2019, ESG-related shareholder resolutions received 46% support from asset managers such as DWS, Allianz Global Investors, and Blackstone10.

Going further, investors can engage with companies on climate action. Climate Action 100+, a coalition of investors with $47 trillion assets under management, recently called on 161 companies – responsible for 80% of global GHG emissions – to create comprehensive net-zero climate action strategies for 2050 or earlier11. Shareholder platform Follow This! has brought together more than 5000 individual and institutional investors to exercise shareholder rights and put climate action on Big Oil’s agenda12.

We have even seen investors run public litigations or divestment campaigns against companies that do not respond to climate-action-related requests or proposals. As of 2019, 1187 institutions and over 58,000 individuals with $14 trillion in assets back fossil fuel divestment campaign DivestInvest13. Activist investor ValueAct Capital acquired an equity stake in power company AES, pressuring the company to pledge carbon intensity reduction of 70% by 203014.

Explore climate action-related investment opportunities

Investors can support companies that positively contribute to society and the environment through their products and services. Besides investing in stocks, investors can also build climate action portfolios as part of their investment policy – for example, comprising of green bonds, clean energy ETFs, climate transition equity funds, or other asset classes. Acceptable ESG practices are a prerequisite for investment. Climate action-related themes, including renewable energy, clean transportation, green buildings, energy efficiency, organic farming, pollution prevention, and water storage, can be further linked to the SDGs.

Examples of climate action-related investment solutions

Equity

Green corporations

Clean Energy ETFs

Climate transition equity funds

Cleantech venture capital funds

Debt

Green bonds

Green bond funds

Green infrastructure debt

Climate private debt funds

Other asset classes

Green infrastructure funds

Green property funds

Sustainable real estate securities fund

Sustainable real assets

Low-carbon transition targets still require annual funding of $1.6 to $3.8 trillion from 2016 to 205015. To fight climate change, investors must avoid ‘greenwashing’ and recognize the importance of collaboration. For SDGs and the Paris Agreement to become a reality, individuals, businesses, enabling organizations, and governments must put their differences aside and collaborate for the greater good.

At Elevate Capital, we understand, measure, and act on climate related-risks and their impact on your investments. There are still no vaccines in production for climate change, but this time we might not need one. The cure is simply in our hands.