Last updated: 14:11 / Thursday, 17 March 2022
Opinion

Investing for Impact on the Road to Net Zero

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The 2021 Glasgow Climate Pact has had one indisputable positive outcome: a greater acceptance by governments globally to accelerate efforts to keep temperatures from rising more than 1.5 degrees Celsius by 2050 because actual progress toward earlier commitments has not been good enough.

But COP26, as the climate summit was known, also had uncertain outcomes, including the specific roles of government, regulations, and public and private enterprises. Another uncertainty: How to finance the transition and its economic impact on the world economy? The answers to these questions and the behavior of investors as stewards of capital will determine how turbulent the road to Net Zero will be.  That’s why we believe that investing for impact should be a primary concern for investors today.

But what does “investing for impact” really mean?

First, it means taking a broad view of Sustainability, one that encompasses Climate Change, Planetary Boundaries, and Inclusive Capitalism. Second, it involves taking a long-term view that focuses on the structural changes the global economy will likely experience over the next 30 years and beyond.

Taking a holistic view of sustainable investing

Investing for positive impact on emissions starts by accepting that Net Zero does not mean that the use of fossil fuels should be zero or that investors should divest completely from all oil and gas.

While renewables (such as wind and solar) are forecast to represent an increasing part of the energy mix, both oil and natural gas will still play a crucial role in producing a steady supply of energy. “Even when the world achieves net-zero emissions, it will hardly mean the end of fossil fuels,” two academics—co-founding Dean of the Columbia Climate School Jason Bordoff and Harvard Kennedy School Professor Meghan O’Sullivan—write in Foreign Affairs. “A landmark report published in 2021 by the International Energy Agency (IEA) projected that if the world reached net zero by 2050 … it would still be using nearly half as much natural gas as today and about one-quarter as much oil.”

Reducing gross greenhouse gas emissions will not be enough. We also need to remove what is already in the atmosphere—called carbon sequestration—and evaluate nascent technologies that can facilitate such mitigations. Taken as a whole, these areas can create ample opportunities around investing for impact.

Thinking in terms of planetary boundaries allows investors to take a more holistic view of investing with a sustainability lens. For example, the two major carbon sinks our planet has are oceans and forests, so ensuring they remain healthy will be crucial in limiting global warming to 1.5-degrees Celsius. Additionally, oceans and forests also impact food, water, and human health, which are core to our livelihoods. Managing the impact of biodiversity loss is another example where investors will find plenty of opportunity to make a positive impact with their capital.

Inclusive capitalism is also a major “investing for impact” theme, one that advances a “just transition,” where all stakeholders are considered. For example: If the global population expands to nine billion people, there will be constraints that will make it difficult to produce the required number of calories to sustain that population. However, creating solutions that ensure such constraints will not exacerbate hunger or cause social unrest would create many investment opportunities.

Augmenting access to credit is another area that can advance a more just transition and should also produce many investment opportunities. Diversity and inclusion in the workplace, often cited as a starting point for inclusive capitalism, also offers opportunities, given research from firms like McKinsey & Co. showing that firms with greater diversity tend to outperform their less diverse peers.

Taking the long (term) road to Net Zero

Investing for impact requires a long-term view that takes account of the structural changes needed for the global economy as well as the considerable macroeconomic implications of climate change. It also entails adopting a broad, climate-aware, risk-management framework. For example: Climate change can impact the economy gradually (i.e., rising sea levels or changes in rainfall patterns) or abruptly (i.e., more extreme weather events, such as droughts, wildfires, and floods.)

It will also impact inflation, as many costs that had been externalized—in other words, taken out of the product level and absorbed elsewhere—will likely have to be internalized back into the production process.  Examples of costs that have been externalized include the environmental toll of unincumbered gross emissions, the over-exploitation of the commons (such as oceans and forests,) and labor costs being driven lower by globalization. Climate change can also produce exogenous shocks that can affect the supply (and consequently the cost) of key commodities.

Daunting as all this may sound, it is our firmly held belief that the challenges we face on the road to Net Zero will be equally met with solutions that, in turn, will generate potentially attractive investment opportunities. Adopting an investing for impact mindset will not only help us successfully reach our Net Zero destination, it may also provide a less bumpy ride for investor portfolios.

(Matt Christensen is Global Head of Sustainable and Impact Investing for Allianz Global Investors, based in Paris, Mark Wade is Head of Sustainability Research and Stewardship for Allianz Global Investors, based in London.)

 

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