Philanthropy Impact

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Climate: the defining issue for the next decade

Impacting investing: trends, issues and capabilities

Magazine article

Rapid and accelerating change is everywhere – including the investment world. Over the last decade, there has been a steady growth in impact investing, yet it has remained a relatively niche area. As of today that may still be the case, but it is unlikely to be so for long. 

Anyone who has not gone cold turkey on the news for the sake of their mental health in the last year will know that, finally, the climate emergency is garnering the attention it demands.

Just to recap, in that short time we have had:

The IPCC Report identifying that global warming is likely to reach 1.5 degrees, if we continue to emit carbon at current rates, by 2030

• The UK government legislating to achieve net zero carbon emissions by 2050 and the report of the UK Climate Change Committee demonstrating how that might be achieved

• National and local governments, businesses and organisations declaring climate emergencies across the globe

• The Bank of England publishing an open letter on climate-related financial risks stating that, “If some companies and industries fail to adjust to this new world, they will fail to exist”

Extinction Rebellion protests and school strikes across the globe demonstrating the scale of public concern around the issue

• Pension trustees being required soon to produce a Statement of Investment Principles which sets out financially materiaconsiderations (specifically including climate change) over the appropriate time horizons of the investments

• Hot topics for businesses including ‘Effective Climate Governance on Corporate Boards’ and ‘Managing Transition Risk’

• The PRA issuing a Supervisory Statement for banks and insurers on managing the financial risks of climate change

A coalition of charitable foundations approaching the Charity Commission and Attorney General to seek a ruling on trustees’ investment duties in the context of climate change specifically and more broadly in relation to the societal impact of investments by public benefit organisations.

That is a lot happening and is by no means all of it. For the most part, it is not activists, or the left, coming out with this stuff either. This is the political, financial and business worlds beginning to face up to the situation we are in – and doing so because climate is a political risk, a financial risk and a business risk, as identified as long ago as 2006 by Lord Stern and by many since from Carbon Tracker and CDP through to the 34 central banks and supervisors comprising the Network for Greening the Financial System. It is essential to understand though this is not an issue for the compliance or risk teams to manage in isolation. It must inform attitudes, behaviours and practices across the industry. 

For the most part, it is not activists, or the left, coming out with this stuff either. This is the political, financial and business worlds beginning to face up to the situation we are in.

To comply with the Paris Agreement aspiration of limiting warming to 1.5 degrees, fossil fuels have to be left in the ground, while failure to achieve 1.5 degrees will lead to circumstances which will have significant detrimental impact on the value of whole markets and economies. Either way, fossil fuels are no longer a sound long-term investment.

The question becomes not if but when to divest, and given the precipitous fall in value when that happens at scale, that is a huge financial risk (regardless of the other consequences of continuing to invest). The ‘fail to exist’ threat voiced by Mark Carney is a real one. In other words, not responding appropriately will not only mean negative social impact, it means negative financial impact too. You cannot disaggregate the social and the financial.

In other words, not responding appropriately will not only mean negative social impact, it means massive negative financial impact too. You cannot disaggregate the social and the financial.
 
In this context, impact investment begins to seem less of an optional extra – ‘the icing on the cake’ – and more the means to preserve the cake. It will not be enough to ring-fence a small proportion of a portfolio for social or ethical investment, while continuing business as usual with the vast majority of your funds. It will be necessary to look at all your investments to ensure you are not causing negative climate impact overall. This is all good news.
 
The regulations and changes in public attitude listed above create an easier environment in which to mainstream impact investing without it seeming peculiar or sacrificial. The opportunities for impact investing are likely to increase too. Much is being made currently of the Just Transition and Green New Deal which will require lots of capital investment – investment which may bring significant social benefits countrywide and beyond. Already, the cost of renewables infrastructure is coming down significantly, making it an investment free of subsidy dependence. And at the recent Responsible Investor conference in London, there were tales of it being easier to fill a green bond issue than more traditional offerings.
 
Conclusion
 
The implications for professional advisers to ultra high-net worth (UHNW) individuals and high-net worth (HNW) individuals are clear. Investment decisions must be viewed through a climate lens. Sometimes this may be directly (i.e. looking to invest actively to reduce carbon emissions), or sometimes indirectly (seeking to ensure investments across a portfolio are not increasing emissions). If advisers do not proactively embrace this change, a combination of clients, regulators and the market will force their hand. It is part opportunity, part threat, and for each adviser to determine how to face this challenge.