Warren Buffet once said, “Cash combined with courage in a time of crisis is priceless.” Warmer temperatures are making extreme weather and other climate events more likely, threatening to throw communities around the world into an economic and social crisis within this century. So will those with the “cash”—the institutional investors who own an estimated $70 trillion in capital—have the courage to respond?
WRI, in partnership with 2° Investing Initiative and UNEP Finance Initiative (UNEP-FI), hopes to give investors the tools they need to help solve the climate change challenge. Our Portfolio Carbon Initiative is developing resources to help financial institutions contribute to climate change solutions (“climate friendliness”) and manage climate-related financial risks in their portfolios (“carbon asset risk”). Our draft publication, Climate Strategies and Metrics, discusses the various strategies that institutional investors can pursue to help finance the transition to a low-carbon economy.
3 Activities to Improve Climate Friendliness
We define climate friendliness as the intent of an investor to contribute to greenhouse gas (GHG) emissions reductions and the transition to a low-carbon economy through investment activities. Investors can make many types of investment decisions to increase the climate friendliness of their portfolios.
For instance, investors can modify their portfolio’s exposure to different sectors, companies or technologies by purchasing more bonds for green projects, such as renewable energy facilities or low-carbon building retrofits. This can propagate low-carbon technologies and support the growth of the low-carbon economy over time. A good example is the growing U.S. solar industry, which added 31,000 jobs in 2015.
Investors can also avoid financing carbon-intensive assets like coal fields, coal mines, oil fields and refineries. Divestment is a strategy that’s garnered ample attention lately. For a single institutional investor, the impact of divestment on the real economy may be limited—for every investor that steps out of a high-carbon asset, another may step in. However, divestment can have a powerful impact by sending a strong signal to policy makers and other investors and can create more opportunities and investment flows for low carbon technologies and assets A critical mass of like-minded investors can drive up the cost and limit the availability of capital for carbon-intensive investees.
Another important approach for institutional investors involves leveraging influence rather than capital. Investors may choose to directly engage their investees to influence the allocation of capital towards low-carbon technologies or to promote climate-friendly practices. For example, BP has recently agreed to be more transparent about its climate impacts after shareholders put pressure on the fossil fuels group. Though this strategy can impact emissions, the investee’s management or majority of shareholders must support the strategy in order for it to succeed.
There are numerous metrics that investors can rely upon to determine which sectors, companies or technologies are climate friendly—check out our draft paper for more information.
Investors Are Starting to Respond
A handful of investors are already starting to respond to the climate change challenge. Thirty-four investors representing $1.4 trillion in assets signed up to the Montreal Pledge, an initiative led by PRI that asks investors to commit to measure and disclose the carbon footprint of their portfolios. Five asset owners have joined the Portfolio Decarbonization Coalition (PDC), led by CDP and UNEP-FI, which asks investors to commit to decarbonize a total of $100 billion. The PDC broadly defines “portfolio decarbonization” as any type of systematic investor action in line with climate change objectives, including engagement with investees as well as modifying the make-up of investment portfolios.
Though investor climate action remains small, the success of recent pledge platforms and the growing popularity of green bonds indicate an appetite for sustainable investment opportunities. By providing resources for investors that increase their understanding of their impact on the transition to the low-carbon economy, we hope to expedite this trend.