Can markets change to meet the desires of conscionable activists and save the planet?

By Anthony Rowley

You don’t need to be Swedish climate activist Greta Thunberg to be concerned about climate change. A generation of millennials and post millennials are showing rising anxiety over environmental and socio economic problems and are looking for ways to help solve them.

Legions of younger investors are interested in putting money into saving the planet (and saving mankind, for that matter). But the global financial system arguably is failing to deliver the means for them to do so effectively. Trillions of dollars of private investment, along with similar amounts of public finance, will be needed to finance the transition to a lower carbon economy and a more sustainable economic and social environment in general.

The dimensions of this challenge do not seem to be fully appreciated even by those professionals who are actively promoting different approaches to sustainable investment, let alone by idealistic young activists and certain cynical politicians.

There is no shortage of sustainable investment products on offer a confusing variety of them, in fact but arguably none of these offer investors in stocks and bonds a direct way to get behind sustainability. This is part of the case made in a recently published book of which I was principal author, and which appears at a time when interest in sustainable investment has never been stronger or the need for it greater.

Sustainable investment is about more than just investing in a lower carbon future. The climate threat is focusing the world’s attention on sustainability in a way that has never happened before. It wasn’t only Greta Thunberg and former US vice president Al Gore who sounded the alarm about climate change and global warming during the recent World Economic Forum in Davos, Switzerland. Such concerns are shared by most thinking people.

The focus on climate change in Davos was hardly surprising given the bush fire infernos that were raging in Australia at that time along with the sharp increase in climate related disasters around the world.

Sustainable investment is taking portfolio investors (in stocks and shares) into areas which until quite recently were considered to be mainly the province of governments and of official agencies. As Larry Fink, the CEO of the world’s biggest fund management group BlackRock, has observed: “We are on the edge of a fundamental reshaping of finance.”

This raises important questions that have not yet been addressed as closely as they need to be. For example, just how much money is it going to cost to transition to a more sustainable future, who is going to pay the costs, and what is the best way to go about investing in sustainability?

Sustainable investing comes in many (often rather confusing) shapes and forms such as socially responsible

Looking forward
Opposite, climate activist Greta Thunberg speaking with the media as she arrives for a meeting of the Environment Council at the European Council building in Brussels on March 5.

investing, ethical investing, thematic investing, impact investing, green bonds, SDG investing, and ESG (explained below) investing. Achieving a more sustainable future whichever route we take is not going to come cheap. The Bank of England estimates the global cost of transitioning to a lower carbon environment at up to $90 trillion over the next ten years or so.

Much of this will need to go toward writing off “stranded assets,” such as fossil fuel power plants, coal mines and oil refineries that become redundant in a new green age. These vast sums might be termed the cost of “re-tooling” the global economy for sustainability. They are mind boggling amounts of money. The $90 trillion figure is equal to the value of one year’s global economic output or GDP of the entire world. It is also equal to around 13 years of global corporate profits which some estimates put at around $7 trillion a year.

Business corporations will not be happy about devoting a dozen years of profits to the cause of sustainability. Neither will their shareholders. So, when we talk about investing in a sustainable future, it will come at a high price that will need


to be borne by the corporate sector as well as by governments and taxpayers.

Then there is the issue of how best to invest in saving the planet. We can do things like planting more trees perhaps, but the “economic agents” (as economists like to call them) that matter most in terms of getting things done are governments and private firms.

Thousands of central and local governments and official agencies will need to be involved in the transition to sustainability. So too will myriad private firms, and the obvious question is how to go about coordinating the efforts of all these economic agents.

One way is to try to shift corporate behavior in the direction of greater sustainability. That is what Kofi Annan did in 2004 as General Secretary of the UN when he requested the CEO’s of the world’s 50 largest firms to participate in a joint initiative within the UN Global Compact. He urged them to adopt the concept of ESG investing and embed it into corporate behavior. ESG stands for the environmental, social and governance factors that thousands of firms in Europe and North America are now integrating into their business strategies.

ESG is catching on in Asia but there’s a long way to go. One study published in 2019 noted that the share of ESG investments in total Asian assets under management was just 0.7 percent, compared to 12.6 percent in Europe and 14.4 percent in the US. It was also under 1 per cent in Japan.

Until quite recently, asset managers were more concerned with doing no harm than with doing good. They exercised influence by selling (or refusing to buy) shares of companies seen to be engaged in harmful or socially undesirable practices. Today, many are going a step further and seeking to influence corporate behavior by buying the stocks of companies that comply with ESG principles and using their influence to push them further in that direction.

One example in Japan is the Government Pension Investment Fund, which encourages fund managers to support ESG principles. The Bank of Japan, the biggest investor now in exchange traded funds, is using this fact to exert influence on companies to follow sustainable practices.

ESG and other forms of sustainable investment are not really targeted enough to satisfy the needs of those investors (younger ones especially) who want a more handson approach, especially toward climate change. Another route toward sustainability for investors is through “Impact Investing,” where investors require not only a financial return on their investment but also evidence of a measurable impact.

Such investments are found in areas like clean energy and water, low income housing. micro finance and other socially oriented ventures. It is a promising area for joint investor action on specific projects and is taking root in some Asian developing countries. The size of the market is still small, however, at around $500 billion.

There are also “green bonds” aimed at financing climate friendly ventures such as solar and other forms of renewable energy development. The green bond market has developed rapidly in recent years not least in China and its popularity seems likely to continue rising.

The 17 Sustainable Development Goals (SDGs) adopted by the UN are aimed at achieving sustainability across a spectrum of development ranging from actions to offset climate change, provision of clean energy and other infrastructure, to providing health and education facilities, tackling poverty and promoting economic growth. They are worthy goals but again come at a price. This could be between $5-$7 trillion annually between now and the year 2030 according to UN estimates. That is anything between $50-$70 trillion dollars in total over the coming decade.

Once more the question is “Who will pay?” The UN says that governments could come up with half and the rest covered by the private sector. Financial markets are going to have to find between $30 to $45 trillion to meet those goals.

Apart from whether markets are willing and able to supply such, sums there is the issue of how to translate the SDGs into a form where investors can invest in one or more according to their priorities. There are a limited number of SDG investment funds but arguably there needs to be a much wider selection that match the needs of investors both large and small who currently cannot direct their savings toward ESG goals via mutual funds, exchange traded funds (ETFs) or by investment in individual companies.

The market is hungry for such products and it will be a pity if that hunger goes unsatisfied through lack of a sufficient menu of sustainable projects. Sustainable investment is still a “work in progress.”

Anthony Rowley is a former president of the FCCJ. He is a co-author of Sustainable Investment Impact in Asia, published jointly by Asia Asset Management and the United Nations Development Program (UNDP), upon which this article is based.