Skip to main content

Fund Managers, Here’s How to Invest for a Low-Carbon, Climate-Resilient World

Five years ago this week, with the signing of the Paris Agreement, 189 countries made ambitious climate commitments, including to make all finance flows consistent with a low-carbon, climate-resilient world. Now, investors are increasingly focusing on climate change.
LUCAS DE BEAUFORT
MALINI SAMTANI
DECEMBER 14 2020

Banner

What was once investing exclusively for financial returns, has over the last two decades gravitated toward investing for profit, people and the planet. It's worth considering why this is the case.

Concepts like environmental, social and governance filters (ESG), sustainable, and impact investing have all come to the forefront with fund managers not only advocating but also requiring their portfolio companies to have sustainability strategies. This makes common business sense – impact strategies facilitate fundraising and sustainable projects tend to generate stronger economic returns.

IDB Invest, a pioneer in this field, has been promoting this sustainability shift to all its clients, so we partner with fund managers who share this vision and are willing to embark on this journey. This global evolution of investing sustainably has set the stage for so-called Paris-aligned investing.

Five years ago this week, the Paris Agreement called for limiting global temperature rise to well below two degrees Celsius and to pursue efforts to limit it to 1.5 degrees Celsius above pre-industrial levels.

Asset and fund managers control trillions of dollars, and how they choose to invest these funds will play a significant role in whether the goals of the Paris Agreement can be achieved. This is why, one key feature of the Paris Agreement is to make finance flows consistent with a low-carbon, climate resilient world.

Doing so is becoming easier over time too: the knowledge, tools and methodologies to align the financial sector with the Paris Agreement are being published at an exponential rate.

To begin, money managers must commit to aligning their portfolio to the Paris Agreement; in other words, commit to a climate-resilient portfolio immediately, and a net-zero portfolio by 2050. Fund managers recognize that climate change is one of the most significant risks and opportunities for their portfolios and understand the need to assess and address these risks and opportunities.

Gráfico

The Taskforce on Climate-related Disclosures (TCFD), an initiative supported by some of the world’s largest asset managers, provides businesses a useful reporting framework, and BlackRock, the world’s largest asset manager with $7 trillion in assets under management, is using its leverage to push its investee companies to follow its reporting standards.

It is important to understand that the TCFD categorizes the financial risks of climate change in two categories: physical risks, encompassing the financial impact of climate change events such as floods, hurricanes and droughts, and transition risks. The latter refers to risks for businesses that do not prepare themselves for the low-carbon economy, and face stranded assets as a result of competing new and affordable technologies, shifting consumer preferences and regulatory changes.

In order to protect their assets, fund managers should align their portfolios with the Paris Agreement, using tools like the TCFD, and should roll out a Paris-aligned investment strategy, accompanied by business plans that outline their approach by region and sector.

While there is no single universal guidance for Paris-aligned investing, more research is increasingly available for investors to choose from. The key, is for investors to use the information available now, and continually adjust and improve as more research becomes available. Upon establishing their investment strategy, we propose three initial steps to explore Paris-alignment in investment portfolios:

  • First, fund managers should seize business opportunities associated with the low-carbon future and invest in companies conducting sustainable, climate-resilient business and companies offering clean tech and other climate solutions.

  • Second, they should develop an exclusion list for investments that are clearly not aligned with a 2-degree future, including fossil fuel investments. In addition to not investing in any new companies engaging in these activities, they should develop a strategy to engage existing portfolio companies to decarbonize.

  • Third, they should assess how to support resource efficiency and climate resilience among companies that cannot be classified as climate solutions, nor as “dirty” industries, but that will need to upgrade their business operations over the next thirty years in order to comply with a 2-degree future.

Finally, fund managers can help create an enabling environment for businesses to help limit climate change and navigate the inevitable effects thereof, as well as steer the market to disclose decision-useful information. Particularly for smaller fund managers, it can be overwhelming to keep up with constantly evolving market developments and standards. IDB Invest has the expertise, experience, and resources to accompany its clients on this critical journey.

 

 

AUTHORS

Climate change

Related Posts

  • Banner

    Fund Managers, Here’s How to Invest for a Low-Carbon, Climate-Resilient World

    Five years ago this week, with the signing of the Paris Agreement, 189 countries made ambitious climate commitments, including to make all finance flows consistent with a low-carbon, climate-resilient world. Now, investors are increasingly focusing on climate change.

    Read more
  • Banner

    Five Years After Paris, Latin America and the Caribbean is an Example for Climate Policies

    Although some warned that short-term problems would hide long-term ones under COVID-19, the crisis has highlighted the interrelationship between environmental and social issues. The implementation of the Paris Agreement in the region has become a roadmap for recovery.

    Read more
  • Banner

    Sustainable Energy & Infrastructure As Components of Economic Recovery

    COVID-19 is not helping to curb climate change despite a moderate decrease in pollution due to less industrial activity and transportation, but it allows us to rethink energy policy decisions that will have a relevant, decades-long impact on the climate, and should help mitigate the problem.

    Read more