How do investments affect Climate Change?

Every year, investors trade about $250 trillion in stocks, bonds, and other long-term assets in global capital markets. A rising number of these investors are concerned about the relationship between climate change and the assets they purchase and sell.

Some investors are concerned about climate change for financial reasons: they feel it will harm specific investments and want to acquire assets that will be well-positioned in a climate-change-affected future. 

Other investors are concerned about climate change for moral grounds. They want to assist climate solutions by investing in firms whose goods or activities serve to mitigate the consequences of climate change. By not investing in enterprises that contribute the most to climate change, they seek to force these corporations to reform.

But how are investments and climate change connected?

Investment decisions can have a variety of effects on firms that generate fossil fuels, resulting in decreased emissions. 

First, the availability of investment resources influences the cost of capital. Increasing the cost of capital or restricting its availability makes it more difficult for a firm to finance its operations. 

In capital-intensive sectors such as fossil fuels, which require a steady supply of significant sums of money to explore and develop new projects, it can swiftly render those projects economically unfeasible, resulting in fewer projects and reduced emissions. It also makes renewable energy more competitive.

Second, investments are a tangible demonstration of support that provides businesses with a social license to exist. This, like increasing the cost of financing, sends a signal to governments, other businesses, and consumers that these corporations’ emissions are a concern, and that those other organizations should be weary of contributing to their operations. This means fewer new projects and, as a result, less emissions.

Finally, where those money are spent instead has the potential to magnify the impact of this action. Choosing to invest in renewable energy or other comparable investments accelerates the transition to a lower-carbon economy for the same reasons (but in the other direction). 

How can investors contribute to dealing with climate change?

Capital markets trade thousands of different stocks and bonds, making it difficult for any investor to understand how climate change impacts each of them. Investors require tools to help them make educated decisions regarding climate change across all of their investments.

ESG ratings ESG ratings generally assess the impact of environmental, social, and governance factors on a company and a company’s impact on the outside world. Many ESG ratings include details on specific climate change factors, like companies’ greenhouse gas emissions.

ESG funds have a stated mandate to invest in stocks and bonds with high ESG ratings. ESG funds may also have a specific theme, like high ratings for climate action, giving investors a way to own a diversified portfolio of stocks and bonds that satisfy specific climate criteria.

Green bonds are issued by companies, governments, multilateral institutions and banks to fund projects that help slow climate change or are otherwise good for the environment. Investors in green bonds expect that the funds will be spent on specific projects that benefit the climate, like building renewable energy or restoring forests.

Divestment is the decision to sell an investor’s holdings in a whole class of assets—like stocks in companies that produce fossil fuels. Divestment from fossil fuels is a frequent aim of climate activists, and is growing quickly among investors with strong public constituencies, like governments, pension funds, universities, and faith-based organizations.

Bottom Line:

Investments can have a significant impact on climate change. On the one hand, investments in renewable energy, clean technologies, and sustainable infrastructure can help reduce greenhouse gas emissions and mitigate the impacts of climate change. These types of investments can also create new jobs and economic opportunities, spur innovation, and improve public health.
By making sustainable investments and supporting climate action, investors can help create a more resilient and sustainable future for both the environment and the economy.