November 3rd was Finance Day at COP26. Where various net zero announcements were made by financial institutions across the globe and net zero plans became mandatory for financial institutions in the UK from 2023. But commitments and plans will mean nothing without action. Here are some ways the investment and finance industry – and we – can turn vast amounts of money ‘green and clean’ right now.
The need to mobilise finance for the low carbon transition is not new to the COP country Parties. A programme on long-term climate finance was launched 10 years ago at COP17. The goal being to monitor developed countries’ strategies and approaches to raising large amounts of green finance. During COP21, the year of the Paris Agreement, businesses including the finance and investment industry were asked to publicly pledge their support by signing the Paris Pledge for Action. This year, the COP26 secretariat helped to coordinate alliances across the globe to seek out credible investor and corporate net zero commitments in support of the Race to Zero. The secretariat also gave space to NGOs and organisations creating the technical guidance and advocating for the policy change needed to make commitments a reality.
This has been super helpful. We must encourage every sign of progress. But investors and banks don’t have to wait for a new COP campaign or government announcement to act on climate. There is plenty they can do right now to turn trillions in finance green.
Here are some of the ways:
Apply an ‘ESG Plus’ investment strategy
ESG stands for environmental, social and governance and is the new investment industry trend accounting for 49% of assets under management (AUM) in the UK alone.
What ESG is often mistaken for, but is not, is an exciting new wave of investment caring for people and the planet. ESG is a financial loss avoidance (or risk mitigation) strategy that does not seek sustainability outcomes. For example, a tobacco company produces a product that kills people. But it could still have a high ESG score because it uses water efficiently (the E) and has low employee turnover (the S) meaning their costs will likely be lower and profits higher.
ESG investing rewards companies that are less bad. What we need are strategies encouraging companies to be more good.
Sustainable and impact investing strategies are where it is at. Yet they only account for around 3% of all AUM in the UK. Supercharging existing ESG strategies with an overlay of forceful company engagement and voting – ESGPlus – is needed if we are to decarbonise industries. A strategy that has the potential to be more effective than divestment and simply passing those shares on to another investor.
That doesn’t mean divestment has no place. Any investor unwilling or unable to engage fully and effectively with their high carbon investments shouldn’t be invested that way. An investor may also divest to redirect capital away from doomed companies or industries and towards their clean and green soon-to-be successors. Both shareholder engagement and divestment – done well – have their place in a just transition to a low carbon future
Deny new debt
Investors and lenders can starve high carbon business-as-usual by denying new requests for investment (a new bond for example) or lending.
To illustrate the impact ‘denying debt’ would have on companies, in just 6 years since the Paris Agreement, the fossil fuel industry has reportedly received a massive $3.8tn in new bank lending.
Combined with a shareholder engagement strategy, investors will effectively take a two-pronged “Engage the Equity, Deny the Debt” approach to climate action. The catchy mantra coined in 2015 by Dr. Andreas Hoepner before it was popularised by Scotland’s Lothian Pension Fund in 2020.
Apply climate rules to passive funds
Passive funds – or index funds – contain a portfolio of stocks mirroring the companies in, and targeting the performance of, a market index such as the S&P 500.
This is a fast growing investment strategy because of the low cost compared to actively managed funds where the fund manager takes a more active role in stock selection and allocation. So indices, and the companies they include, are very important.
The EU has provided some ‘Climate Transition’ and ‘Paris-Aligned’ minimum standards for index providers to use. These include a requirement for companies to reduce emissions by at least 7% each year to stay included in the index and, by extension, the fund.
These or similar rules should be requested by all passive investors wishing to avoid climate risk and help bring down global emissions.
Invest with impact-first objectives
We are experiencing a crisis that the Intergovernmental Panel on Climate Change (IPCC) said is increasing “challenges to both economic and societal feasibility after 2030″. If the planet fails, we all fail. No matter how cleverly invested the industry thinks it is.
Impact-first investments that make financial return a secondary objective to the regeneration of nature and all its living expressions are urgently needed. 12.2% of people own 85% of the world’s wealth – thats a lot of spare change. Let’s use it to bring back life on earth.
Check out this recent example from Generation Investment Management who launched Just Climate to catalyse and scale up investment towards the most impactful climate solutions. And make climate-led investing an industry imperative.
Advocate for carbon pricing
Many banking and investment institutions have policy teams advocating for policy and regulatory change that will support the success of their business. Long-term investors, particularly pension funds, will also advocate for a more sustainable economy. This is to protect the future value of our pensions from, for example, financial losses caused by environmental collapse. These policy resources should be used to advocate for a price on carbon that makes polluters pay today for the long-term damage they are causing. Rather than innocent pension claimants – and the rest of society – picking up the bill tomorrow.
Making carbon too expensive to emit will really change the game.
“Okay, cool. How can we help?” I hear you cry.
No, we don’t have to wait or pray for wealthy investors to do the right thing. You and I have some powerful options available to us to help shift large amounts of money towards a no-carbon future. Here’s how:
Email or tweet your pension provider demanding they decarbonise their investments (your money!) and tell you how they are progressing on a yearly basis. Follow Make My Money Matter.
Demand access to your voting rights as a company investor (yep, having a pension makes you an investor and shareholder) by pushing your pension to integrate a platform like Tumelo.
Become a shareholder outside of your pension to access company voting rights in order to shift behaviour. Visit Shareaction, Follow This and TulipShare.
Demand your bank end all new lending to fossil fuel companies immediately or consider switching to an ethical alternative. Follow ShareAction, Ethical Consumer and Economy of Good.
Consider investing with as little as £5 in positive impact companies and industries. See Good with Money and Economy of Good for UK options.
Attention goes where money flows. And we need a lot more of it flowing towards a zero-carbon future. Fast. These were some ways to do it. Stay in touch and let me know what you did to clean up your cash and invest in the planet.
It may be a long road ahead, but it is always possible.
Disclaimer. This article is for information only and not financial advice. Do your research and compare your options before making financial decisions. Or speak to a qualified financial adviser.