Investors and Financiers Need to Mobilise Around Green Solutions: Buy or the Market Dies.
In the words of Morgan Stanley CEO James Gorman, when asked about climate change, “If we don’t have a planet, we’re not going to have a very good financial system”. Climate risk is something the science community has known for a long time which has gone largely ignored by the financial sector until the last decade or so. Without changing business habits, many markets, assets, and our economic stability itself will be in jeopardy - Insurers paid $135 Billion to claims of natural disasters in 2017 alone, some of these were business offices, factories and warehouses.
So what can be done? Governments are already spending billions, but public money is often too risk-averse and almost always in short supply. Around £13 Trillion is needed by 2035 to mitigate climate change and maintain our life-dependant systems. There is no straightforward answer, but with more pathways comes a wider scope for innovation.
The private sector, finance more specifically, can make headway where governments cannot. There are challenges ahead, governments have historically subsidised renewable energy projects with tariffs and sourcing requirements; these have slowed down, especially in the UK. Being the first-mover is always a risk, but when there is an even greater risk waiting around the corner, it becomes good sense to invest where the inevitable change lies. Though banks and funds are cautious to take positions too far from the crowd, the safety of a relatively stable market is fading with each day and it will be the risk-takers that find safety on dry land.
The risks are becoming ever-present, and existing investments will yield less and less. Profitability of assets and people will depend more on factors that were once secondary considerations, such as weather, terrain and health. The IPPR report on climate change notes climate instability will lead to impacts on economies from weather disruption, missed days from illness or injury, diseases due to flooding and damage to communication systems, infrastructure and energy lines. For many the consequences have arrived already; Standard & Poor downgraded a number of assets due to climate-related risk, and changes to a nearby river prevented German chemical giant BASF from shipping products, leading to delays. The risk of taking little or no action is that the entire economic system will be no safer than anyone else from the extreme climate shifts.
Another case for a shift away from business as usual is the unfavourable economics of fossil fuels in the near-future. Fossil fuels accounted for 85% of all subsidies across the world in 2017. At the same time fossil fuels are struggling without cash injections, renewable energy is becoming more competitive, solar energy saw a price-drop of 73% in the same year. In his book ‘The Switch’ Chris Goodall outlines how global spend on fossil fuels, for extraction, infrastructure and development, will continue to rise in the century while Solar power is expected to become cheaper with each decade, it will beat oil in the market in less than a decade, and in places like Chile it already is (p.59). Companies in the UK such as Octopus are already providing renewable energy at market value and they supply energy from residential producers too. The world will soon require renewable energy to replace fossil fuels to prevent economic collapse — Chris Goodall’s expected costs of fossil fuels by 2050 are around $81 Billion which is currently the rough amount of world GDP (p.p. 27–28). It makes pure economic sense to move into the market for renewables while the functional need for them is relatively low and the market is not yet mature.
Public sector spending won’t be enough. The UNFCCC Paris Agreement has marked $100 Billion for investments in climate action; Compared to the $13 Trillion needed to mitigate disastrous environmental change, this number is hardly scratching the surface. As the governments of the world continue to grow out from the 2008 crash, large spending is still an issue, and though many populist regimes have taken power, they are predominantly on the right and either deny climate change or do not wish to spend money on issues not related to national politics. The President of Brazil, Jair Bolsonaro, as Amazonian fires rage, denies responsibility for the destruction of one of the Earth’s clean-air and carbon-neutralising resources.
Carrying on as usual is a false confidence risk and will certainly have repercussions. The economies of the world need to shift behaviour — lower yields and less security are inevitable at some point, but the longer we leave it, the worse it could get. VividEconomics report the current average value of at-risk financial assets is $4.2 Trillion. It is not really a case of reaping huge financial benefits, but more about saving what we have and protecting the finance sector so that profits can still be made. That being said, the returns on many climate solutions can be suitable for many investors. The returns on physical assets such as solar farms can be around 4–6% and are widely recognised as reliable holdings. Some climate funds are even promising up to 12% returns. Investment groups like Greencoat Capital and Trig (The Renewables Infrastructure Group) who own and invest in renewable energy assets show promising yields and have a stable market presence (The Switch p.p. 79–85, 126–130, 196–199). Incubation for new green ideas and potentially high-yield energy technologies can be pushed further. New solar technologies, lighter and stronger wind energy components and even more diverse types of batteries for storing energy are slowly emerging from universities and start-ups are optimistic investments.
To conclude again with James Gorman’s statement, it is simple but poignant. The finance sector won’t just be poorer without fundamental change, but possibly set for disaster. The good news is that finance bosses can see the writing on the wall and invest smartly before the market shifts completely and all gains are nullified. There is no excuse anymore to invest in coal, oil or gas, and ignore the benefits and urgency of green investments especially when the risk of doing nothing means existing assets and securities may no longer function in the way they have ever done before, or function at all.
