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Finance world must step up innovation to fight climate change

Investors want companies and projects which directly help environment

| Southeast Asia
Buffalos graze in dried-up Chandola Lake in Ahmedabad, India: some investors would welcome the opportunity to invest directly in projects aimed at climate change.   © Reuters

Last year ended on a somber note for earth's climate: bush fire infernos raging in Australia; the COP 25 environmental negotiations in Madrid not securing concrete commitments; and Bank of England Governor Mark Carney warning that the financial system is not doing enough to avert a climate disaster.

Carney, who will soon assume the role of U.N. special envoy for climate action and finance, is right, and the irony is that these failures come when zeal among investors for climate and other reforms has never been greater. Yet it is largely the financial system that is letting them down.

The essence of the problem is a lack of suitable investment vehicles to enable individuals or financial institutions to invest directly in goals such as alleviating climate change and global warming, or achieving a host of other social and economic reforms for that matter.

Rapidly growing numbers of investors are eager to save the planet: no longer just philanthropists and social foundations but pension funds, insurance companies, private equity groups and individual investors. 

When they try, they come up against what even expert industry practitioners call a "fuzzy" array of investment opportunities, chief among which is buying shares in companies that promise to adhere to ESG, or Environmental, Social and Governance, criteria -- and selling shares in those which do not.

This is all well and good in the sense that it encourages better corporate behavior and governance in general, but it is hardly a direct approach to curbing the impacts of climate change. Increasing numbers of savers and investors want more direct, hands-on involvement.

Impacting investing, which aims at achieving measurable social, economic and financial returns on investment, is promising, and there are other forms of sustainable investment that go by numerous different labels. But all are only indirect solutions to climate change problems.

This needs to change. Governments alone do not have the financial or physical resources to save the planet. The resources of the private sector -- around $300 trillion held by the global financial system, according to the U.N. -- are essential in this regard.

There are pointers to where these funds, or part of them at least, need to go. In 2015, the U.N. General Assembly adopted 17 Sustainable Development Goals, representing a "universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030."

Fighting climate change is one among the 17 but other goals link indirectly to it. Governments can provide only half of the $5 trillion needed annually to finance the SDGs between now and 2030, says the U.N., with private investment needing to do the rest

Beyond a handful of vehicles such as the PG Life Fund run by Swiss-based Partners Group, which focuses specifically on the SDGs, there are few ways to invest in achieving them. What we need is a pipeline of projects aimed at climate change and dedicated investment vehicles for such projects.

The projects need to correspond with the aims of the SDGs. They could be in renewable energy, pollution control and perhaps subsidizing the cost of replacing stranded fossil-fuel plants such as coal-fired power stations. They could also include infrastructure projects, water supply especially, as well as health and education facilities. Some investors would welcome the opportunity to invest directly in such projects.

But who is going to feed the pipeline? It needs to be a multilateral agency, perhaps the World Bank or its sibling organization the International Finance Corporation, which has a strong track record in sustainable investment. It could be regional development banks and other agencies.

Existing systems can encourage businesses to do the right thing on sustainable investment by awarding them ESG status to impress investors, or withholding such status and deterring investors. But there are limits to what individual companies can achieve as economic agents.

Much effort is going into making investment sustainable one way or another in environmental, social and governance terms by a plethora of bodies such as the Principles for Responsible Investment, the Global Impact Investing Network, the Global Sustainable Investment Alliance and so on.

International rating agencies are providing investment indexes to guide sustainable investors, and exchange traded funds are drawing retail investors into the arena. Accounting bodies are addressing the issue and a growing number of companies are reporting on their environmental impact.

All of this laudable and necessary, as is the role being played by central banks, led by the Bank of England under Carney, to address the problems facing financial institutions and businesses in dealing with stranded assets.

But few or none of these initiatives tackle head on the need to match the desire by a growing tide of sustainable investors to become more directly involved fighting climate change. This needs a more fundamental approach to packaging investments.

As Marc-Andre Blanchard, Canada's Permanent Representative to the U.N., has said: "There will be no one silver bullet that solves the SDG financing challenge [but] private capital is the one source with the potential to reach the scale required." This will require significant collective effort from all in finance.

Anthony Rowley is a former Business Editor and International Finance Editor of the Far Eastern Economic Review. He is the author of a recent book on sustainable investing published jointly by Asia Asset Management and the United Nations Development Programme.

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