CleanTechIQ recently hosted our latest webinar, called How History, Movements and Impact Investing Leadership is Influencing the New Wave of Climate Solutions Investing. The event brought together experts in impact investing to discuss how asset owners are catalyzing the growth of impact investing, in order to advance the transition to a low-carbon economy.
We polled our live audience of more than 100, including institutional investors, private banks and family offices, regarding how they plan to make an impact on climate change with their investments. The results: 71% said they are investing in renewable energy, while 59% are divesting from fossil fuel investments. This clearly shows strong enthusiasm for investing in low carbon solutions by this segment of investors.
How Policy is Impacting Climate Investments
The webinar began with an overview of the current policy environment for addressing climate change. Luke Seidl, Senior Associate and Research Analyst at Veris Wealth Partners, described how the threat of climate change has been well-understood by scientists since the 1980’s, and said that federal support for addressing climate change has ebbed and flowed under different presidential administrations.
Executive branch support has currently ebbed, to say the least. Since the Trump administration pulled out of the Paris Agreement, the strongest support for climate change currently is the “America’s Pledge,” a coalition of 3000 businesses, state and city governments, and investors that are committed to reducing greenhouse gas emissions consistent with the Paris Agreement. Seidl also pointed towards continued strong support for clean energy policy at the city and state level.
Globally, there’s major policy support, and investor enthusiasm, for the rollout of electric vehicles, particularly in the fast-growing markets of China and India. This creates a big opportunity to lower carbon emissions, he said.
The Fossil Fuel Divestment Movement
Lisa Renstrom, cofounder of the Divest Invest Individual Campaign; board chair, Confluence Philanthropy; and trustee, Bonwood Social Investments, presented a review of the Divest-Invest movement and what’s behind its success so far in the U.S.
The organized effort to get institutional investors to divest their ownership of fossil fuel companies started In 2014 with Divest Invest Philanthropy, when 17 philanthropic foundations, with combined assets of $2 billion, announced they would divest from fossil fuels and invest in clean energy.
The movement has since spread to high-net-worth and even retail investors, Enstrom said. As of last fall, investors with a combined $6.24 trillion in assets had committed to being fossil-free.
Three main factors have driven the success of the movement, Renstrom said:
- There is a financial premise based on the concept of Stranded Assets, which was first introduced by Carbon Tracker.
- This concept was well-defined, as there was a specific and finite list, focused on the top 200 companies that “had the most carbon on their balance sheet.”
- Finally, the movement generated a lot of publicity by having major champions, including major healthcare organizations, municipalities, pensions, universities and foundations.
Renstrom also noted that the largest growth in divestment today is from philanthropic investors, with faith-based investors comprising a large segment. This is due to the fact that philanthropic foundations that traditionally focus on health are now recognizing that climate is closely related to health, which is driving them to divest from fossil fuels. They realize that climate is something that needs to be addressed when considering issues around health, Renstrom said.
Investment Opportunities – Can You Divest from Fossil Fuels?
Michael Lent, Chief Investment Officer and Partner at Veris Wealth Partners, described the investment options for investors that want to lower their carbon footprint.
He said that the most common question that Veris Wealth Partners gets from its clients when discussing divestment is: “What is the impact of removing fossil fuels from the portfolio?”
The data suggests there is actually very little negative impact on returns over the long term, he said.
Furthermore, there are growing opportunities to invest directly in climate solutions across asset classes as the industry matures and becomes more cost-competitive with fossil fuels.
There is now a strong business case for companies and municipalities to reduce their exposure to fossil fuels, he said, which is driving strong demand for climate solutions at the local and state level, despite the opposition at the federal level.
What Strategies Are Available?
There are more options for investors to go fossil fuel-free, with 150 mutual funds and ETFs that are fossil fuel-free and that incorporate ESG screens, Lent said. Managers with diversified strategies have more options to optimize their portfolios by excluding heavy carbon emitters.
However, he cautioned that it’s important for investors to know exactly what is being excluded, and to evaluate the criteria that a fund manager uses to reduce the fund’s carbon footprint.
Fund managers evaluate their carbon footprint by analyzing the intensity of CO2 emissions of the companies they invest in, Lent said, and there are various approaches to do this.
He noted that a major issue with such analyses is that company reporting on emissions is voluntary, and investors often need to extrapolate this data to use in their carbon footprint analysis. However, there are efforts underway to mandate companies to disclose CO2 emissions data, he pointed out, so this should improve in the future.
Another climate solutions strategy is shareholder engagement. This can be seen as investors are increasingly pursuing shareholder resolutions to compel companies to report on climate risk, issue sustainability reports, and set greenhouse gas reduction targets, Lent said.
Investing in green bonds is another good option for investors looking to decarbonize their portfolio. Most green bond proceeds go toward funding low-carbon projects, and nearly $1.5 trillion in green bonds have now been issued. There are a variety of options to invest in green bonds, including municipal, sovereign and corporate bonds.
Another option is a Community Development Financial Institutions (CDFI) fund, which focuses on expanding affordable housing. CDFIs are increasingly helping to build climate resilience in low-income communities, such as by installing solar panels on rooftops and improving energy efficiency.
There has also been an “explosion” in alternative private market investment opportunities in clean technology, energy efficiency and sustainable agriculture, Lent said. One key attribute for impact investors is that private market funds can more directly measure the impact they are having in offsetting CO2 emissions.
He also pointed to “tremendous opportunities” for clean energy infrastructure investment in emerging markets in Africa, Asia and Latin America. Many of these fast-growing markets are pursuing a decentralized energy system and bypassing the traditional grid infrastructure.
Lent said that as investors make decisions on which funds to invest in, they should to seek to understand how managers are providing solutions and utilizing data to report on specific outcomes that are important to investors based on their own impact priorities.
To watch the full webinar replay, click here.