Mehasa Consulting | Article Posted Date: 16 November 2021

The urgency to address climate change is unprecedented, as highlighted by the Intergovernmental Panel on Climate Change’s sixth report, published in August 2021. The report delivers a stark warning: immediate and decisive action is essential.

Regardless of policy directions, the transition to a low-carbon world hinges on the private sector’s ability to leverage talent, innovation, and capital.

Historically, capital markets have driven transformative themes that shape our economies and societies. Climate change is no different. Numerous private sector initiatives aim to align capital with sustainable markets and opportunities. Long-term investors are already redirecting trillions of dollars towards mitigation and adaptation efforts to meet the Paris Agreement goals set in 2015.

Addressing climate change in investing now requires a shift in value creation perspectives. It is crucial to look beyond short-term gains and focus on long-term risks. Social, human, and natural capital are poised to influence economic value creation as significantly as traditional financial capital.

However, the leaders of nearly 100 major institutions in the global investment industry indicate that capital markets have been slow to incorporate climate risks. The consensus is that a green portfolio alone does not equate to a green planet. Progress has been sluggish and is more apparent in public equities than in other asset classes. In alternative investing, advancements are visible in infrastructure, real estate, and private equity, where customized mandates are closely linked to green outcomes. Despite this, survey respondents believe there may be a misallocation of capital due to market failure and inefficiency, stemming from two primary barriers:

Firstly, climate change involves complex scenarios, and the data needed for robust modeling are still under development. Widely accepted standards and definitions are evolving slowly.

Secondly, public policies in critical areas such as carbon pricing, alternative energy, and mandatory data reporting by companies have been slow to advance due to competing immediate priorities.

Three recent developments could be pivotal: the COVID-19 pandemic, which has highlighted the discord between humans and the planet; a global shift towards a strong green agenda; and the United Nations COP26 conference in Glasgow in November 2021. These factors are expected to enhance policy clarity through new initiatives, easing barriers that have hindered progress in climate investing.

Over the next three years, markets are anticipated to make significant strides in pricing climate risks. With improved clarity and collaboration among investors, governments, organizations, and consumers, we can collectively advance towards a more sustainable future.