Investing in Green: The Private Economy Must Bridge the Gap Through Climate‐Friendly Investments
In the wake of Earth Day, economic policy makers have reiterated their commitment towards combating climate change, focusing specifically on its impacts on key factors that impact economic growth. The Federal Reserve recently decided to include the impacts of climate change in its economic outlook, especially on indicators such as demographics, immigration, government finances and income inequality. Since the Trump administration’s controversial U-turn from the Paris Climate Accord in June 2017, the outcry for policy combating climate change has been hard to silence. Even with prominent economists and financial policy makers joining the tirade for carbon taxes that would help reduce the greenhouse gas emissions, the Trump administration has stood its ground to protect carbon producers.
The economic costs of the short-termism in their climate policy have been largely reflected by the projections for a 36% loss in United States’ GDP per capita due to climate change. Furthermore, government reports like the National Climate Assessment recognize that unhindered climate change could eventually cost damage in the hundred billions, and that the pace of these damages is determined by human activity.
However, the data is not all disappointing – the greenhouse gas emissions trajectory for the United States has been revised to reduce by 2030 – with credit being given to lower level policy makers and the private sector. While the federal commitments have been deemed highly insufficient, the private sector is covering the gap – mainly due to the impacts of climate change on capital investments and financial stability that have been predicted. The recommendation lies in increasing investments in companies that promise long-term sustainability, as green asset classes become a significant portion of all investments and the climate impact criterion becomes more regarded by financial asset managers. An emerging asset class, deemed ‘green’ bonds, are helping raise capital for projects with environmental benefits and are often tax-free investments. The green bonds that were issued by the World Bank in 2008 now form 2.5% of global bond issuance, with $170-billion worth issued annually, according to The Economist. Climate Investment Funds are predicted to issue $500 million in green bonds to raise finances for 300 environmentally friendly projects in 72 countries.
But does the proliferation of green bonds mean they should be a private or institutional investor’s priority? While many environmentally focused investors seek to increase their environmental impact by investing in these companies, their opaque bond issue terms mean that there lies the risk of information asymmetry. The lack of a set regulation framework also poses a threat towards investments, and the undeveloped markets spell liquidity issues. However, global data on climate change risks is growing and requirements on companies to insure against them is incentivizing them to be more eco-friendly. Plenty of sustainable energy companies remain undervalued, and are bound to grow in the face of current climate outlooks and a privately driven turn towards decarbonization. Prioritization of infrastructure development, preparations for more frequent natural disasters, and a more sustainable resource distribution are the most important approaches to combat climate risks, and to do so, the focus must be on institutions and companies that are paving the way.
Written By Yashwini Sodhani, Undergraduate Economics Student
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