Weather and climate disasters in the U.S. shattered records last year, according to a report the National Oceanic and Atmospheric Administration (NOAA) released last week, which was largely lost in the news of the extremist insurrection and siege of the U.S. Capitol building. The country was rocked by 22 separate disasters costing over $1 billion each, surpassing the previous record of 16 billion-dollar disasters linked to climate change in both 2011 and 2017.
With numbers like those, it’s no surprise that investment managers continue to look at environmental, social and corporate governance (ESG) funds as an area with huge potential. While the private sector has made some strides, opportunities abound, and investment groups like Invesco see benefits in using tools such as the Transition Pathway Initiative (TPI), an asset-owned project that provides data to guide informed investment decisions.
The TPI tool assesses companies based on their preparedness for the transition to a low-carbon economy. Engagement with the initiative gives investment groups such as Invesco “a direct opportunity to structure a conversation" with the companies in their portfolios, said Glen Yelton, the firm's head of ESG client strategy in North America. "Additionally, as the highest emitting sectors are the focus of TPI, the resulting disclosure and transparency will have a disproportionate impact on evaluating climate transition efforts,” he continued.
Investors can then integrate that data into their investment analysis. As the data sets grow, investors can then track and compare changes over time regarding a particular company’s performance on ESG indicators.
One of the trends that continues to emerge in the ESG space is shifting priorities to align several components for better targeted investing. For example, since the start of the coronavirus pandemic, the intersectionality of issues such as inequality, environmental and climate justice, climate change, and systemic racism has been made abundantly clear.
To that end, companies need to think of a bigger picture in how they set up their ESG priorities. Yelton said: “The increased attention being paid to various topics has just amplified the message that these are matters that cannot be pushed off until next month or next year or next decade for consideration and action. Collective investor initiatives are a powerful tool to influence change and collaborate with corporations in their transitions [to a more sustainable future].”
Climate change and its related problems will continue to “drive assets away from strategies that are apathetic to climate change and [toward] those that are underwriting and investing in action to address the fundamental issues,” Yelton predicted. More and more, the costs and opportunities will be too great for any company to ignore.
While economics and the pressure to align with societal goals will drive investment decisions, this won't happen in a vacuum. Government support and policy can together help secure better regulatory certainty and fair-play rules to frame investment opportunities. Further, government can and should invest in solutions for climate change to spur innovation and generate additional investment opportunities.
U.S. President-elect Joe Biden has already signaled that he intends to prioritize climate action in his administration, front-loading his cabinet and advisors with climate hawks and economists who have an eye toward climate justice. In order to be successful, the incoming administration must also include private-sector stakeholders to ensure policies make sense for both the public good and the bottom line.
There are many ways to slice the climate cake, because every sector is or will be affected by climate change. For example, using a water lens could lead to more efficient investing in the utility, agriculture or data storage sectors. For its part, Invesco accounts for corporate performance across a diverse set of indicators — "from gender to water to environmental outcomes," said Maria Lombardo, Invesco's head of ESG client strategy in Europe, Africa and the Middle East. “Our engagement efforts encompass a variety of issues as and when relevant to the companies and entities with which we are in dialogue," she said. "It is our expectation that those engagements will continue to further in a positive manner performance on issues such as board diversity, emissions reduction, and other topics.”
Investors see the opportunities in climate solutions, and increasingly, those take a broader, more inclusive view. It is no longer enough to invest only in low-hanging fruit. Addressing climate change and its many layers of impact will require data to ensure effective, targeted investment by both the public and private sectors.
Image credit: Jason Blackeye/Unsplash
Kate is a writer and policy wonk, with a focus on water, clean energy, climate change and environmental security. She spent over a decade running energy-water nexus and energy efficiency programs at Environmental Defense Fund as well as time at the U.S. Departments of Energy and Defense, U.S. Government Accountability Office, and state and federal legislatures. She serves as an Advisory Board member of CleanTX, which aims to accelerate the growth of the clean tech industry in Texas.
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