Decarbonisation and Climate Change Investing: What and How?

The evolution of ESG and climate change investing and its impact on net-zero emissions

The focus on climate change has increased; investors and companies have started to consider ESG factors. This started as a method to reduce reputational damage and risk to the organisation in case of any disasters related to the environment, social strata or the government. However, in today’s world, the focus has shifted on to climate change investing and to invest in areas that positively impact world problems, including robust action taken for climate change.

Companies have been doing their bit in regulating carbon emissions and promoting renewable energy developments. They have been moving towards sustainability, and net-zero carbon emissions are their new target. All of this is done with ROI in mind since everything in business boils down to profits. Companies are looking for investment opportunities in expanding markets. Any climate change investing opportunities related to the plant and people now represent attractive options.

Investment opportunities by 2030 supporting net-zero carbon emissions

Carbon emissions have been increasing daily due to expanding industrialisation, despite global regulatory measures. More regulations are needed if countries and companies around the world are to realise their 2030 net-zero carbon targets. At least $2.4 trillion needs to be invested every year for several decades if we are to remain on the path of decarbonisation. However, only one fourth of the said amount is invested in current ties. Public and private capitals are the essentials that are needed to meet the fund gap and enhance opportunities for investors leading to sustainable development.

Decarbonisation’s influence on investment opportunities

The decarbonisation drivers that will influence investment opportunities are –

1. Consumer behaviour: More people are now aware of the importance of sustainability, and hence, consumers have been changing their lifestyles and behaviours to meet their consumer choices. Many of them are slowly moving towards a plant-based diet, changing their travel mode and becoming more conscious about their choices related to cosmetic manufacturing and supply chain disturbances.
2. Regulation: Regulations and laws also affect how investors look at sustainable and climate change investing. For example, Biden in 2020 declared that the US has been focusing on creating more and more jobs in the lines of ‘saving the planet’, which in turn will lead to people investing more in sustainable projects.
3. Geography: The highest carbon footprint in the world comes from China, a whopping 28.8%. However, the US is 14.5%, and the UK contributes 1.1.%, which is also going to act as an influencer with investors thinking about investing in favour of climate change initiatives.
4. Technology: Rules and regulations often lead certain products and practices that cause climate change to be banned. This, in turn, creates a demand for advanced technology and new innovation, which acts as a strong investment hedge.

How can an ESG investor find genuine companies contributing to real world problems?

One must look for ‘carbon avoided’ companies when looking to invest in legitimate companies solving genuine problems. These companies should have a definite competitive advantage, contribute effectively to create a net-zero world, and generate significant returns.

The considerable scopes for investing in such companies are –

1. Learn about the emissions that arise directly from the company’s own activities, including but not restricted to fuel-burning onsite.
2. The total energy the business consumes.
3. The indirect emissions that the company may be a part of, relating to its supply chain or produced after the product is sold/used. For example, a car manufacturing company.

Since most companies fall under the last scope, they are often missed out on while considering total carbon emissions. People invest in these companies thinking that the direct carbon emission is smaller. They often don’t realise that companies directly manufacturing goods impact the environment negatively and are at least as bad (if not worse) as companies directly contributing to increasing the carbon footprint.

Concluding statement: What is the best solution for climate change investing?

Well, there are two objectives that you must value as complementary objects. The first one is to create a pragmatic impact on the world, and the other is to generate investment returns. When both of these objectives are met – both the investor and the planet’s climate are in better positions.

There are still various third-world countries with staggering poverty, unequal income distribution, and an extensive climate threat. There is a lot to do, and only greater investment will surely address these challenges. However, to be resolved, it is going to take years more than we have imagined because the damage done by humans is more than the earth can take.

Measuring a company’s impact on the real world and its intent is also important while making investment decisions, it needs to deliver the environmental promises it has made, the financial impact actually creates solutions to problems it offers. Such questions add value when an investor is considering ESG investing for a sustainable future and incremented returns.