Investing in the age of climate change. 2022. Bruce Usher. Columbia University Press.
The scientific consensus is that climate change is real, happening now, and potentially catastrophic. As a result, most countries have committed to reducing greenhouse gas emissions with the goal of achieving “net zero” emissions by the middle of the 21st century. Achieving reductions requires large-scale innovation and investment.
Columbia Business School’s Bruce Usher approaches the issue from an investor’s perspective Investing in the era of climate change, identifies the implications of climate change for the investment community and how venture capital allows us to ‘save ourselves’. The role of investors, he says, is nothing less than “funding the future of the world.”
Early in the book, Usher takes stock of technological developments that can mitigate the effects of climate change: renewable energy, electric vehicles, battery storage, green hydrogen, and carbon removal. This discussion serves as a valuable introduction to subsequent sections that address the implications of these climate solutions for the investment community.
One section identifies alternative strategies that the investor can use:
- Risk mitigation
- Environmental, social and governance (ESG) investment.
- Thematic impact investing (to fund companies that address a specific environmental or social challenge, such as climate change)
- Impact First Investing (in which investors focus on solving social and environmental problems and are willing to accept a lower than market financial return in exchange for greater impact)
Each of these strategies is suitable for a particular type of investor. University endowments can opt for Divestment, large fund managers for ESG, specialist fund managers for Thematic Impact Investing, and philanthropists for Impact First Investing. Some approaches help control risks; others (according to Usher) may improve yields.
Stating that “all investors should understand the opportunities and risks of investing in real assets that deliver climate solutions,” the author looks at financial and real assets. Real assets include renewable energy projects, real estate and forestry and agriculture. Their analysis examines valuation issues relevant to large-scale renewable energy projects, along with information on government incentives and potential returns (internal rates of return of 6% to 8% for solar and wind projects and potentially more for higher risk investments in battery power). storage systems). The real estate discussion is brief, but includes considerations such as flood and wildfire risks, as well as the benefits of energy improvements; the Empire State Building is an interesting example. The chapter on forestry and agriculture illustrates the importance of carbon markets.
The author’s analysis of financial assets includes chapters on venture capital, private equity, public equity, equity and fixed income funds. They give us interesting examples of successful and unsuccessful investments, along with the following approaches to evaluating investments in the age of climate change:
- Does a company minimize risk by reducing its emissions, both direct and indirect?
- What would be the impact of a price on carbon?
- Is the company an industry incumbent or a disruptor? If it is a disruptor, how likely is it to succeed?
The chapter on equity funds identifies many types of climate-focused funds and exchange-traded funds (ETFs) available today. The analysis covers the differences between low carbon funds, fossil fuel free funds and climate transition funds. The author notes that some of these funds are particularly large and successful: “BlackRock’s Carbon Transition Readiness ETF took in $1.3 billion in its first day of trading, making it the largest launch in the three decades of ETF industry history.”
A successful fund launch is an example of how investing in climate solutions has become mainstream. So is the establishment of bodies such as the Glasgow Financial Alliance for Net Zero: “a global coalition of 450 financial firms managing over $130 trillion in assets committed to reducing greenhouse gas emissions in zero”.
The author believes that fixed income markets will be the most important for financing climate solutions. Part of the reason is their scale, and part is because many projects, with steady cash flows over long periods of time, lend themselves to debt financing. An important area is that of “green bonds”, the market for which is described as “red hot”. By 2021, $500 billion in green bonds were issued. Other innovations in fixed income investing include the securitization of solar leases and loans.
Several times throughout this book, we read estimates of the costs of necessary climate solutions. The various numbers can be confusing, but they’re all broadly consistent with a Boston Consulting Group estimate of what’s required: $3 to $5 trillion annually. This huge level of investment is a huge step up from the current situation (spending around $600 billion per year, according to Usher). The investment is necessary, however, not least because other possible responses to climate change can be convincingly rejected. (These alternatives include adaptation and control of population growth).
A welcome aspect is that the overall tone of the book is optimistic, focusing on solutions rather than resorting to despair. Sometimes, however, this approach means overlooking certain risks to climate goals. For example, animal husbandry makes a material contribution to greenhouse gases (in the form of methane), but apart from references to the success of Beyond Meat, the author offers us few solutions to the issue of animal husbandry. Likewise, it says little about how to mitigate emissions from cement production. Furthermore, while he writes that “perhaps the biggest challenge to achieving net zero is the inability of countries to cooperate,” he says little about how dependent we are on fragile global supply chains for solutions such as systems of battery storage. The author makes it clear, however, that his aim is not to describe all possible solutions to the climate crisis but to focus on the implications of climate change for investors.
Investing in the age of climate change it comes from a wide variety of sources and is well researched and very readable. Some readers may be familiar with much of the material, but for others it may be an inspiration to invest in climate change mitigation, both in the pursuit of investment opportunities and in our collective future.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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