You are probably, like me, thinking about where you can leave a real impact to combat climate change. This year´s summer of weather turbulences did send a clear message: we need to do a lot more to slow down climate change.
You probably do all the personal things already, your waste gets separated, the bike is used more often, food waste is reduced, shopping for things you do not actually need is cut down, and with the additional help of Covid-19, travel plans got revised and your amount of travelling is being evaluated.
But, there is something more powerful we can do as female wealth-owners. Let´s put a spotlight on what an impact female wealth-owners can leave with clever investment choices.
The net-zero transition costs
The transition of the global economy to net-zero emissions will eat up trillions of Dollars, Euros, or whatever currency, with massive opportunities for investors.
The supposed distinction between what’s good for the environment and what’s profitable has diminished. Investments needed for the emission-intensive industrial and mobility sectors, are a complex undertaking but can only be successful with the right coordination and cooperation. The transformation of today’s carbon-generating assets can only be done at enormous cost, billions will be needed in the tech -sector, property sector, equipment, and the extensive supporting infrastructure.
Electricity is expected to be the cheapest and most energy-efficient decarbonization technology, but it is doubtful that this will be sufficient to meet the pledge for a net-zero carbon world. Half of the emissions reductions required will have to be achieved through technologies currently commercially not available (e.g. hydrogen-based fuels). To stir industries like shipping, aviation, and steel to net-zero, will depend on the availability of alternative solutions to electricity.
New technologies need to be developed and commercialized at a large scale, too many alternative decarbonizing technologies are still in the pilot and/or early deployment stage. Most are past the research and development stage and have been validated at some level, but scaling these technologies to a point where they are commercially viable remains a capital-intensive and risky undertaking. With the help of private capital, the widespread deployment of these technologies can be vastly accelerated.
Who will be first?
Venture Capital Funds are currently at the forefront when it comes to funding innovative tech companies but they will not cough up the hundreds of millions needed to turn the current carbon emission heavy industries around.
Institutional investors might have the capital available but shy away from the risk the use of new technologies pose. Willing private investors depend on financial products being made available to them by banks or other wealth management institutions, but there is too little enthusiasm from financial institutions to make them available. However, the information provided to them is too thin and foggy and the institution’s responsibility too high.
It’s not all dark out there, there are some ESG funds and EFTs and the Hongkong Stock exchange set up STAGE an online portal providing information and access to sustainable, green, and social investment products. According to Bloomberg ESG assets may hit $53 trillion by 2025, a third of global AUM (Asset under Management). The Us and Europe are trying to catch up with the urgency and governments as much as financial institutions have understood the necessity to speed up the process of establishing a financial blueprint for investors. Asia however except for Honkongs STAGE is lacking behind and needs to catch up.
Financial institutions have made commitments in excess of $70 trillion but the transition of capital to investments is bumpy and too slow. The main challenge seems to be the demand vs. supply issue, caused by the fuzzy communication where the deal vs. level investment risk is concerned
The public sector will have to play its role to incentivize private capital, by reducing the risks. For example as a co-investor, with tax incentives, or loan guarantees.
The burden can only be shouldered by a multi-stakeholder financing ecosystem. Capital providers with different risk appetites should be able to invest at different stages. Banks, asset owners, insurers, venture capitalists, and private equity funds will all have to play roles.
Because coordination and cooperation are urgently needed if we want to reach the zero carbon emission goal by 2050. Relevant players need to demand the information they need and be brought together to ensure the transition is facilitated.
A few years ago, awareness of climate change might have made you change things in your personal life, like changing energy provider, or flyng less, but now the awareness is greater that you also need to think where your money is going because that could be supporting things that you don´t want to support, or it could be going into areas that could actually help combat climate change
Alice Ross, FT Editor
Capital markets and climate change
The global ambition to tackle climate change is encouraging and capital markets need to play a vital role in this. Efficient and regulated trading platforms for sustainable finance products need to be established to raise the capital necessary to support companies on their sustainability journey.
Global market operators are increasingly embracing the opportunity, and responsibility, to introduce ESG risk management and reporting. This will help investors to make investment choices in alignment with their needs and standards. ESG metrics need to be explained to issuers and investors alike, and market operators need to understand that making available and accessible ESG reports and performance data will be vital for any progress tracking in the future.
ESG – Environment, Social, and Governance – standards set a benchmark for companies around the globe. It is now upon financial market regulators to require risk management and reporting according to ESG standards as a core requirement for all companies who are or seek to be publicly traded. Market operators need to understand that it will be required to provide ESG transparent reporting before they can raise capital in global markets.
Proactive and transparent ESG reporting and data will help companies to raise capital and to finance the transition to a low-carbon economy and more sustainable business model. As such, exchanges should work closely with international bodies to promote a system of international reporting and performance standards that closely links sustainable finance with responsible business practices, to generate credible ESG data and avoid greenwashing.
However, this is far from being the only solution to incentivize investors because the financial investment environment still has far too many hurdles:
- There is a mismatch between capital supply and demand, caused by the risk and return profile of investors
- There is a considerable shortage of available investment products available to investors
- A lack of reliable regulations and political certainty. Countries still differ greatly in their political approach, from a lack of govenment driven transition plans to global standards
- For investors too little data is made available, carbon guzzling industries provide fragmented transition plans and techcompanies fail to reassure investors with longterm performance data of the investment.
Zoom
The transition of the global economy to net-zero emissions will eat up trillions of Dollars, Euros, or whatever currency, with massive opportunities for investors
The biggest question is who will foot the bill
The burden can only be shouldered by a multi-stakeholder financing ecosystem
Efficient and regulated trading platforms for sustainable finance products need to be established to raise the capital necessary to support companies on their sustainability journey
It is upon financial market regulators to require risk management and reporting according to ESG standards as a core requirement for all companies who are or seek to be publicly traded
ESG is far from being the only solution to incentivize investors because the financial investment environment still has far too many hurdles
Investors and the tech industry do play their part in the high-risk perception of decarbonizing technologies
Only close cooperation between investors, issuers, and market operators will steer global economies in the right direction to meet the most pressing challenge of our time
There is a dysbalance between capital available and actual investments made
Win-win situations for all involved need a financing blueprint, tailor-made for specific industries and their ventures this must include adequate compensation for the unique risks involved
Vicious Circle
Many would-be investors still see the transition of capital to new ventures popping up along the way to a net-zero world as risky. Many industries can look back on years of optimizing existing operations, new technology can introduce an array of uncertainties, and a trial and error period could result in a competitive disadvantage in the near future. However, without a learning curve and new technologies, the competitive advantage for a whole industry could be lost forever.
Economists warn, of unnecessary destruction of any industry´s assets. They fear an economic downturn, a considerable rise in energy prices, and high inflation. The destruction or annihilation of valuable assets will have a considerable price tag accompanied by inflation. Trillions would go to waste, well functioning and valuable assets will go to waste and productivity suffers in the short term and wages will rise in the long term. However, doing nothing will turn the light out for everyone in the not too distant future. Trying to undo something that took years to get wrong overnight is like throwing out the child with the bathwater, and will damage the global economy and social peace.
Ecologists and engineers state the destruction and reconstruction of existing industries will cause high carbon emissions, so any transition has to be carefully assessed, planned, and monitored or the carbon emission caused by the transition could outweigh the benefit. A solution would be to give priority financing to technologies that focus on how to reuse assets to a minimum without high CO2 emissions.
Investors and the tech industry alike do play their part in the high-risk perception of decarbonizing technologies. There are far more investors who have no qualms in making small investments at the early-stage of tech companies, despite the high risk. However, investors fail to provide the so desperately needed higher capital at a later stage when the product needs capital to make a product commercially viable, despite the risk being down and the same risk level as any other investment opportunity. Many new technology ventures fail to deliver, not due to a lack of capital in the initial stage of a venture, but because they can´t gain access to the capital needed for the customization of a developed and tested technology. More companies than in any other industry go belly up before they can go commercial-hence the bad reputation.
Not all sustainable investments are created equal when it comes to impact. To create real impact, investors need to demonstrate additionality: that is, is there less carbon emitted because of the investment?
James Giffod, Credit Suisse
Now what ?
Net-Zero has no simple solution, but what has? Just walking away from fossil fuels will not do the trick, and is from an economic point of view, not a promising option. But working across all industries and countries to reduce their impact on the ever-growing carbon footprint will bear fruit.
It is undeniable that only close cooperation between investors, issuers and market operators, will steer global economies in the right direction to meet the most pressing challenge of our time.
Green investments to save the planet have become mainstream, from Leonardo di Caprio, Cate Blanchett and Beyoncée to big investors like Black Rock and Allianz, or the Bank of England who pledge to divest from industries that do not meet ESG standards and/or invest only in companies who do. Over 1,100 organizations and 59,000 individuals, with combined assets totalling $8.8 trillion, have pledged to divest from fossil fuels through the online movement DivestInvest.
E.S.G: Environment-Sustainability-Governance, will inform investors, just like ROI or EBITDA, of the company´s performance, ESG standard will make the environmental footprint visible. The investor now has a label to ease making a responsible investment choice and market players will be pushed to adopt their targets to match ESG standards or else they will fail to raise capital in the future.
ESG standards for publicly traded companies as a must is a step in the right direction however, as global standards on the metrics are still missing it is questionable if all ESG labels contain adequate ESG standards. Since ESG was introduced too much ” greenwashing” has been going on. It is vital to mandate a global ESG standard system and create one central and global authority to monitor standards. This would encourage and reassure investors to make choices beyond shareholder return.
Governments, global market players, and the finance industry need to work on de-risk solutions to incentivize investors. The roles of all stakeholders, investors, public sector, industry, etc. need to be clearly defined throughout the investment value chain and possible risks need to be shared. Win-win situations for all involved need a financing blueprint, tailor-made for specific industries and their ventures this must include adequate compensation for the unique risks involved.
The fact is there is some urgency to supply the industries involved with the capital they need, as there seems to be a dysbalance between capital available and actual investments made into industries contributing to net-zero carbon emissions, policymakers need to urgently create the finance environment to attract willing investors. Apart from improving the commercial viability of investments, governments need to play a leading role to facilitate multilateral investors to leverage their capacities.
The transition won’t happen overnight, but sustainable finance can create accountability to ensure we are progressing at pace towards our collective net zero ambitions.
Greg Guyett, Global Banking, HSBC
Investor focus
The green transition will require investment – between $1-2 trillion each year until 2050, which is a total of around $50 trillion. That number looks daunting, but it is achievable if policy-makers, the financial sector, and market players quickly shift gear and answer the many questions many willing investors have.
One fact remains: many types of investors will play a key role in getting the world greener. There are two crucial mechanisms for a value-added investment, and investors need to be laser-focused on these:
Seed and growth capital into illiquid investments, specifically, venture capital funds backing early-stage companies focused on climate innovation. If the whole world is to transition from fossil fuels, cleaner alternatives simply need to be cheaper, and this will require funding of rapid innovation.
Simply buying or selling stock in liquid markets from other investors makes a little measurable impact. Long-term shareholder engagement has a 30-year track record of effectiveness in pushing companies to improve. Coalitions such as Climate Action 100+ are aggregating capital representing close to half of the global capital markets to collectively push companies to reduce emissions.
Sustainable investing is not the ultimate solution however, it will be an important part of the solution, especially if the investor´s focus turns to companies with strategies that are most impactful.
