By Mark Tercek
This year’s Climate Week turns the spotlight on an important question in the fight against climate change: who will pay for it?
Attempts to tackle climate change need funding – a lot of it. It will take an estimated $6-7 trillion per year over the next 15 years to solve climate change and to meet the other UN Sustainable Development Goals. That’s a big funding gap.
Fortunately, one sector in particular is well placed to bridge that gap: the finance sector. Just a small fraction of the funds under management in private capital can help us make significant advances on the climate front.
Here are five straightforward ways institutional investors can make a big push for climate.
1) Invest in nature
Clean energy receives the lion’s share of attention – and funding – when it comes to climate change. But another high-impact investment opportunity holds a lot of promise for both investors and the climate: nature itself.
Think planting trees, promoting sustainable forestry, reducing fertiliser use and protecting wetlands from development. These activities don’t just protect habitats, improve air and water quality and provide recreation opportunities – they also sequester carbon from the atmosphere on a cost-competitive basis. Investing in natural climate solutions can deliver a third of the emissions reductions the world needs between now and 2030 to stay on the pathway to keeping global temperature rise well below 2°C – the goal of the Paris Agreement.
To fully realize the potential of these strategies, we need capital to support landscape-scale initiatives, not just smaller one-off projects. Investing in companies that have integrated natural climate solutions into their operations – or urging them to make the leap – can help us reach this scale.
2) Call for better disclosure
Savvy investors are already thinking hard about the risks of climate change. Yet not enough companies are publicly reporting on those risks.
Initiatives like the Financial Stability Board’s Task Force on Climate-related Financial Disclosure are starting to change that. Last year, the task force released a set of recommendations designed to encourage more consistent, widespread climate risk disclosure. These kinds of data will help investors better understand the risks that climate change poses to their portfolios – as well as the opportunities that come from investing in a low-carbon future.
Investors can further accelerate climate progress by supporting initiatives like this to improve climate-related financial reporting – and raising their voices when such reporting seems a little too good to be true.
3) Push the private equity crowd
Since 2012, private equity funds have raised a staggering $3 trillion in capital. Yet the sector is lagging when it comes to factoring sustainability criteria into their portfolios and seeking out companies innovating in climate change mitigation.
Investors can play a big role in pushing private equity firms to focus on investments that deliver carbon emissions reductions, and that factor in environmental risks and rewards. The industry is making some progress here, with some leading firms getting into the game. But investors should continue to drive firms to make sustainability initiatives, including addressing climate change, an even higher priority.
4) Ask tough questions
Institutional investors have a unique opportunity to communicate directly with the largest corporations in which they invest – including energy companies.
In those conversations, they can ask companies to demonstrate how their future annual carbon emissions relate to the pathway that is necessary to stay well below 2°C.
Some investors may argue that this isn’t their job. But it should be. Focusing on these matters can lead to better investment performance if it helps companies avoid risks and seize opportunities that boost their bottom lines.
5) Get (financially) creative
For better or worse, the financial sector has demonstrated their ability for creative financial engineering. Let’s put some of that ingenuity to work addressing climate change.
There’s reason for encouragement here. Take, for example, the explosive growth of the “green bonds” market, which has quadrupled in value from $37 billion in 2014 to $157 billion in 2017. While there is room for improvement in monitoring for compliance with environmental standards, the market has driven more investors to focus on environmental issues.
At The Nature Conservancy (TNC), we’re expanding our toolbox of investment strategies and seeing some good results. In the past few years, we’ve done six major deals through NatureVest, our in-house investment unit. These include a debt-for-nature swap to fund marine conservation and climate adaptation in the Seychelles and an LBO for nature to purchase 160,000 acres of forestland in Montana and Washington, to protect wildlife habitat and sequester carbon. We recently developed the world’s first insurance policy to protect a coral reef. We’ve partnered with Bunge and Santander to provide long-term loans to soy farmerswilling to commit to agricultural techniques that reduce deforestation and conversion of native land in the Brazilian Cerrado. And we’ve demonstrated how tropical forest countries can finance their climate commitments throughsustainable land bonds tied to results-based payment agreements for achieving national emissions reduction targets.
NGOs can’t close these deals alone – there are big opportunities here for investors to partner with organizations like TNC and engineer smart deals that benefit both nature and portfolio performance.
Investors have led before – they can lead again
We’re not asking investors to do anything they haven’t done before. Consider the role they’ve played in dramatically reducing the cost of wind and solar, ending apartheid, and curbing predatory tactics from the tobacco industry.
When it comes to addressing climate change, we are in the race of our lives – and we have an enormous way to go. The financial sector can make a big difference. The positive trends I’ve noted here are reason to be encouraged, but much work remains to accelerate these efforts and take them to scale. If you’re interested in getting involved, please let me know. The environmental movement needs more people – and more resources – on our side.
Mark Tercek is CEO, The Nature Conservancy.
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