Scientists around the world agree that swift action is needed to get the climate crisis under control as human beings have already warmed the planet by 1.1 degrees celsius and temperatures are expected to keep rising at a fast pace.
Communities around the world are feeling the impact of climate change, including longer droughts, frequent floods, more hurricanes and bigger wildfires.
The climate crisis has led investors to focus on ESG (Environmental, Social and Corporate Governance) approaches to investing, including the incorporation of climate transition factors into investment decisions.
ESG investing has become a significant form of sustainable finance for long-term value and has evolved into a crucial force in mainstream investing.
Renewable energy costs are coming down
Thanks to improvements in technology and efficiency, wind and solar energy are less costly to produce than fossil fuels in many cases and show signs of going even cheaper.
Not only are renewable options less expensive at producing energy, but they also don't carry the hidden costs of fossil fuels.
According to the Center for Research on Energy and Clean Air, pollution and health care costs due to coal and oil have a global cost of US$8 billion a day,
Driving a change in attitude
A growing number of large, traditional investors including pension, insurance and sovereign funds are taking a tougher approach with investee companies over global warming.
This change in attitude could have huge ramifications for businesses around the world.
Big investors including ABP, one of the world’s largest pension funds, and Norway’s oil fund, the world’s largest sovereign wealth fund, have said that they plan to divest their investments in companies which do not meet ESG standards, according to FT.com.
Other activist investors use a different approach, by remaining as shareholders but joining or pressuring the board of investee companies to drive a change in attitude.
Impact on investment returns
This change in investor attitude comes as report after report suggests climate change could have a catastrophic impact on investment returns and the global economy if left unchecked.
A report by the UN’s Intergovernmental Panel on Climate Change in August said that “immediate, rapid and large-scale reductions” in emissions were needed to avert a calamitous effect on the planet
The world’s largest asset manager BlackRock (NYSE:BLK) predicted earlier this year a cumulative loss of 25% in economic output over the next two decades if no climate change mitigation measures were taken.
Asset managers are also increasingly expected to prove their ESG focus in order to win new businesses or keep existing clients.
Groups such as Climate Action 100+, a coalition of more than 600 investors with US$55 trillion in assets, have also been established to push companies to change.
Earlier this year, CA100+ said that 52% of the companies it was targeting — which account for about 80% of global emissions — had set net-zero targets.
Will you miss out on investment returns?
By selling out too early on climate grounds, some investors fear they may miss out on strong returns over the next few years.
Interestingly, hedge funds have scooped up shares of oil and gas companies shunned by ESG-focussed investors and have made big profits in the process.
There are also concerns that the shares of polluters including large oil and gas companies could end up in the hands of less diligent investors, who doesn’t care about climate change.
A solution to this would be for big investors to hold their investments and vote for ESG-focused climate resolutions.
Raising the cost of capital
At the recently concluded COP26 U.N. climate change conference, 450 financial firms pledged US$130 trillion in capital to finance the transition to net-zero emissions.
Government policies have already driven large capital flows into expanding the renewable energy sector.
However, the huge increase in demand for net-zero focused financing and factors of production may raise the cost of capital and labour inputs.
Households and businesses have recently seen utility prices rise because of electricity grids’ greater reliance on expensive battery storage technology.
This is worrying especially when many households already face an inflationary pressure, with rising bills due to supply-chain issues.