Changing finance… to finance the change

The investing world takes the effects of a changing climate into consideration

Photo courtesy of Citta Nuova 

3 min read
Lucia Martinez

In 2015, with the Paris Climate Agreement, the nations of the world agreed to keep global warming to no more than 2.7 F°. Crossing that threshold could imperil life on Earth. 

Then last year, at the Glasgow Climate Conference in 2021, the world agreed to phase out coal, double the finance helping countries to adapt to the effects of climate change, and finalize rules for carbon trading. This was all in a bid to “keep the 2.7 F° target alive.”

Alok Sharma, the conference’s president, concluding said, “I am really pleased that this has been delivered.” But he added: “I would say, however, that this is a fragile win. We have kept 2.7 F° alive. But I would still say that the pulse of 2.7 F° is weak.” The work to reach the emissions decline needed and stated in Glasgow must ramp up now.

The move away from fossil fuels to clean energy will require a shift in investment and in subsidies. According to a report by the Sierra Club and the Center for American Progress, it is increasingly recognized that climate-fueled events not only impact ecosystems and communities, but also our economy, by diminishing household income, economic productivity and the ability of owners to pay back loans. 

In addition, the transition away from fossil fuels to clean energy will mean a decrease in their value and possible bankruptcies in the industry. This could cause major losses for financial institutions and a need to rapidly adjust their portfolios.

Unfortunately, this is not only a hypothetical concern. Moody’s Investors Service just released new data showing that “G20 financial institutions have nearly $22 trillion of exposure to carbon-intensive sectors.” 

The combined effect of these so-called physical and transition risks is profound. According to insurance provider Swiss Re, climate change could reduce global GDP by 11–14% by 2050, as compared with a world without climate change. That amounts to a $23 trillion loss, causing damage that would far surpass the scale of the 2008 financial crisis.

And the move to sustainable investing is gaining speed. According to BloombergNEF, sustainable debt products — loans and bonds with proceeds targeted to positive environmental investment or to furthering social goals — which emerged as a class eight years ago, have skyrocketed. They exceeded $750 billion in 2020. In just nine months in 2021, companies, banks and government entities issued more than $1.1 trillion of sustainable debt.

The largest sovereign wealth fund (SWF) in the world belongs to Norway, with $1.35 trillion in assets. It was established in 1990 after a decision by the Norwegian Parliament to counter the effects of the forthcoming decline in income and to smooth out the disruptive effects of highly fluctuating oil prices. Even if its origins are rooted in fossil fuels, in December 2021, the fund stated that companies in its portfolio will be asked to take more specific action on climate change.

The Norwegian parliament decided that the fund should not be invested in companies that contribute to violations of fundamental ethical norms, manufacture certain types of weapons, base their operations on coal or produce tobacco. The fund uses its holding powers to sway votes in companies’ board meetings. Its expectations of the companies largely coincide with the UN Sustainable Development Goals.

Kuwait, with the world’s oldest sovereign fund, and its third largest, is following suit by moving its entire $700 billion assets to comply with environmental, social and governance standards as a way to prepare for a post-oil future.

Green stocks rose quickly after their inception but tumbled at the end of 2021. The S&P Green Bond Index lost 24%, due in part to worries about rising interest rates tied to inflation, unpredictable U.S. politics and regulatory actions, like California’s lowering subsidies for home solar users. 

But even with the stock market slide, this year marked the first since the Paris Climate Agreement in which more money went into green bonds than debt issued by oil, gas and coal companies. The momentum behind the global net-zero transition and investor demand could be the wind that accelerates the transition to a sustainable future.

Join the conversation. Send your thoughts to the editor Jon Sweeney.