The debate and investment in climate change has moved a long way since the adoption of The Paris Agreement in 2015, but, challenges and opportunities remain.
Today many organizations are acting to mitigate climate-related risks and capture opportunities arising from energy transition. Climate-related investing has also benefited from the rapid advance of sustainable investing.
Against this backdrop, the sheer complexity of climate change means that it remains one of the hardest sustainability topics for firms to respond to. Differences of political opinion are also apparent, with some jurisdictions questioning the need for action, while others urgently move ahead.
Nonetheless, we believe the last few years have been hugely positive for climate-related investment. See our 2016 report, Climate change: the investment perspective.
The growing interest in climate change
Overall, the regulatory landscape has evolved rapidly. The Financial Stability Board (FSB), the European Union (EU), central banks, national supervisors and the state of California are among those to have introduced mandatory or consulting initiatives. Public bodies seem to be increasingly proactive in shaping and even prioritizing sustainable investment, particularly around climate change. These efforts, along with a growing body of research, are driving financial institutions’ awareness of the risks and opportunities associated with climate change. Firms are also gaining an appreciation of the sectors, asset classes and financial instruments most likely to be affected.
Many investors have shown an increasing desire to factor climate change into their investments. The same view is gaining traction with, not just younger individuals, but also, many – if not all – institutional asset owners – as evidenced by growing fossil fuel divestments and commitments to green funds. One recent example is a major US public sector pension fund’s decision to commit $20bn to a sustainable investment-climate solutions investment program over the next decade.
This demand has led to a growing wave of action by financial institutions. Many leading banks, insurers and asset managers have committed to addressing climate change and are engaging with clients and investees. For example, one major European bank has begun taking steps to align its entire loan book with the emissions reductions required by the Paris Agreement.
In addition, a global insurer and pension fund were among the founders of “Net Zero Asset Owner Alliance”, and recently pledged to shift portfolios away from carbon-heavy industries.