Earth Day: how impact investments can drive ‘net zero’ agenda

Out-Law Analysis | 21 Apr 2021 | 7:43 am | 3 min. read

Historically many climate related investment strategies have focussed on “not doing bad”: negative screening, divestment and some activism at AGMs. The impact investment movement, which aims to achieve both financial returns for investors alongside measurable environmental or social objectives, will play a vital part in driving the innovation the world needs to address the climate crisis.

Ahead of Earth Day 2021, we look at how climate-related impact investment funds have already funded real world projects and will continue to be driven by the growing demands of policy makers, regulators and savers.

The climate crisis and capital markets

There is broad global consensus, not least through the historic Paris Agreement in 2015, that policymakers, industry and society in general must act in concert to curb the rise in global temperatures to avoid irreversible ecological damage to the planet.

However, with the world’s population and energy consumption only set to increase, reducing the use of carbon, on its own, will not be enough to achieve ‘net zero’ emissions targets that have been set.

Mark Carney, the UN’s special envoy for climate action and former Bank of England governor, recently described the changes that need to happen for ‘net zero’ to be achieved by 2050 as “enormous” and requiring “massive reallocation of capital”. While he said a new, sustainable finance system is emerging, it needs to develop faster than at its current pace.

In a report last year, the International Energy Agency (IEA) said an acceleration in clean energy innovation is needed to achieve ‘net zero’ targets and highlighted the role to be played by the investment community. It said that “the timing of investments and the availability of clean energy solutions at the right time is of critical importance” and that “if innovation timelines can be aligned with net-zero emissions objectives, then this will unlock multi-billion dollar markets for new energy technologies and avoid the risk of billions of tonnes of ‘locked in’ emissions”.

Oliver Crowley

Oliver Crowley

Partner

We expect impact investment’s pursuit of environmental objectives only to grow

Clean energy innovation is a broad term that, from an investors’ perspective, could involve directing capital towards renewable energy projects, such as new on- and off-shore wind farms or solar plants, or into research into battery storage technologies. The Global Impact Investment Network, for instance, has reported on how impact investors provided the funds for a new wind farm in Mongolia which has reduced the local population’s dependence on coal-powered energy.

Equally, investment in clean energy innovation might involve funding projects designed to bring to market new technologies believed to be important to meeting the ‘net zero’ agenda in the years ahead but which, as a result of current costs of development, are at the nascent stage. Hydrogen, for instance, is being explored as a potential ‘clean’ fuel of the future, while new carbon capture usage and storage (CCUS) solutions – including those that would capture carbon emitted at source in factories before it enters the wider atmosphere, even potentially for re-use by other industrial users of carbon – are also expected to play a major role.

Climate-related impact investments extend beyond the sphere of clean energy and might involve funding developments in the electric vehicles market, sustainable agriculture, carbon-capture or construction companies that commit to recycling and re-using processed raw materials, as Norbert Pralle, head of foresight and innovation at construction company STRABAG, has said is “central to a CO2-neutral environment".

The drivers of impact investment

A study carried out by asset management company Robeco found that just 17% of investors have set themselves a zero-carbon objective. However, Robecco predicted that number would rise to more than half within five years. It also predicted that fewer than a fifth of institutional investors would have high-carbon assets from their portfolios five years from now.

Global giants in finance, including Goldman Sachs, are among those that have made commitments in relation to their investment in clean energy, while the recent deal struck between Singapore sovereign wealth fund Temasek and impact investor LeapFrog Investments, which will see Temasek channel more of its funds towards projects chosen by LeapFrog, provides further evidence of the shifting priorities among investors and the greater emphasis being placed on climate risk.

Much of the change is being driven by the approach taken by policy makers, regulators and savers.

Oliver Crowley

Oliver Crowley

Partner

The push for greater transparency on climate-related issues makes it easier for savers to identify whether businesses are embracing climate action

For instance, in the UK, the government has set legally binding climate change targets in the aftermath of the Paris Agreement and subsequently published a series of policy papers, such as its industrial decarbonisation strategy and energy white paper, which are aimed at shaping its and industry’s transition to a ‘net zero’ economy.

These climate-related priorities are also flowing into regulatory decision making. The Financial Conduct Authority (FCA), for example, introduced a new listing rule on climate-related disclosure for commercial companies with a 'premium listing' on a UK stock exchange. That rule, which came into effect in January, is now being extended to other listed issuers too.

The rule changes are part of a broader UK roadmap towards mandatory climate-related disclosures that the FCA and The Pensions Regulator published in November 2020 and build on the voluntary global standards on climate-related reporting set by the Task Force on Climate-related Financial Disclosures (TCFD).

Similarly, mandatory climate governance, strategy and risk management requirements will come into force for the largest occupational pension schemes and authorised master trusts on 1 October 2021.

The push for greater transparency on climate-related issues makes it easier for savers to identify whether businesses are embracing climate action and to move their money elsewhere if they are not. The recent out-of-court settlement reached in Australia between pension scheme Retail Employees Superannuation Trust (REST) and a scheme member also highlighted potential litigation risk investors can face from savers if the perception is that they are not aligned to tackling the climate crisis.

With the power of governments, regulators and society driving climate action, we expect impact investment’s pursuit of environmental objectives only to grow and, in turn, help finance the development of new technologies that will be vital to meeting ‘net zero’ ambitions.