Equity means quite different things to two stakeholders I work with the most:
- Investors who deal in debt and equity and seek to benefit from the risk and opportunity that climate change creates.
- Urban planners and nonprofits dealing in social equity and cohesion and eager to prevent harm based on risk and opportunity created by climate change.
Will these two paths converge in the wood
, as Robert Frost put it? Or, is it never the twain shall meet
as Kipling expressed it?
According to the United Nations-supported Principles for Responsible Investment, $70 trillion (U.S.) of assets under management integrate environmental, social and governance (ESG) factors into core operations. But, peeling back that good news, would we see more social equity ensuing? By and large, the positive and negative implications on communities of climate change aren’t being addressed.
I frequently note that climate change exacerbates the tale of two very different futures – rich getting richer from extraordinary resources for resilience and poor getting poorer due to precarious resilience in everyday circumstances. What would it take for those two futures to cause investors to integrate social equity into their climate strategies, creating what I call Finance “Adaptation Equity?”
First, though, they would have to grasp – and care about – social equity issues. Those investors already trying to achieve sustainability goals are likely to see social equity as material to financial equity because it:
- Accomplishes two ESG pillars – Environment and Social – that link the mitigation of physical risks of climate change with the enhancement of communities. Think of aligning with international standards related to human rights or the 17 U.N. Sustainable Development Goals.
- Unveils new investment opportunities in physical assets that can enhance community equity such as infrastructure and real estate.
- Responds to an admittedly small group of impact investors who focus on beneficiaries and aim for responsible investment to be defined by social equity.
- Portends new pathways for longer-term investors (e.g., pensions) and development funders (e.g., blended finance teams) to apply their assets to climate and inequity affected sectors and regions.
- Enhances understanding of systemic risks within the financial ecosystem by connecting climate change and inequity, especially given that without concerted effort, climate change will make inequity worse – and inequity has been proven to impact markets.
Still, for finance equity to flow to social equity requires work. Here are three strategies for each.
- Include social equity principles in investment policy statements and goals as well as in requirements for consultants and advisors. Ask, “Will this asset improve the lives and livelihoods of lower resourced communities?”
- Make social equity a part of risk mitigation assessments for climate-exposed assets, broadening the scope of the Task Force on Climate-Related Financial Disclosure guidelines to ensure that social elements are privileged.
- Insist social equity be part of green bond project frameworks, asking if the infrastructure asset will have an equal or greater number of lower-resourced beneficiaries.
- Include means to raise fees and taxes related within social equity projects to make them more attractive to financiers. Ask, “How can we make this project a revenue generator?”
- Make calculations that show the market benefits of social equity in your geographies and communicate them to public and private stakeholders.
- Insist that social equity be part of financial assessments for infrastructure and other projects by being present at negotiations and integrated design discussions.
As efforts create successes, failures and draws, both groups should communicate action on social and investment equity with their clients and beneficiaries to help build this field of practice.