Investing in the Age of Climate Change. 2022. Bruce Usher. Columbia University Press.
The scientific consensus is that climate change is real, is happening now, and is 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. To achieve the reductions, large-scale investment and innovation is needed.
bruce usher Columbia Business School addresses the issue from the perspective of the investor, and in Investing in the Age of Climate Change, identifies what are the implications of climate change for the investment community and how investment capital allows us to “save ourselves”. The role of investors, she says, is nothing less than “financing the future of the world.”
Earlier in the book, Usher gives an account 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 later sections dealing with the implications of such climate solutions for the investment community.
One section identifies alternative strategies that the investor can use:
- risk mitigation
- Dispossession
- Environmental, Social and Governance (ESG) Investments
- Thematic Impact Investing (to finance businesses that address a specific environmental or social challenge, such as climate change)
- Impact First Investing (in which investors are focused on solving social and environmental problems and are willing to accept below-market financial return for greater impact)
Each of these strategies is suitable for a particular type of investor. University endowments can divest, large fund managers by ESG, specialist fund managers by Thematic Impact Investing, and philanthropists by Impact First Investing. Some approaches help control risks; others (according to Usher) can improve yields.
Stating that “all investors should understand the opportunities and risks of investing in real assets that offer climate solutions”, the author analyzes both financial and real assets. Actual assets include renewable energy projects, real estate, and forestry and agriculture. His analysis examines valuation issues relevant to large-scale renewable energy projects, along with insights into government incentives and potential returns (6-8% internal rates of return for solar and wind projects and potentially more returns for riskier 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 importance of carbon markets is illustrated in the chapter on forestry and agriculture.
The author’s analysis of financial assets includes chapters on venture capital, private equity, public equity, equity funds, and fixed income. We are provided with interesting examples of successful and unsuccessful investments, along with the following approaches to evaluating investments in the era of climate change:
- Is a company minimizing risk by reducing its emissions, both direct and indirect?
- What would be the impact of a price on carbon?
- Is the company an incumbent in an industry or a disruptor? If it’s a disruptor, what are the chances of it being successful?
The chapter on equity funds identifies many types of climate-focused funds and exchange-traded funds (ETFs) currently available. 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 raised $1.3 billion on its first day of trading, making it the largest launch in BlackRock’s three-decade history.” the ETF industry.
The successful launch of a fund is one example of how investing in climate solutions has gone mainstream. So is the establishment of bodies like the Glasgow Financial Alliance for Net Zero, “a global coalition of 450 financial firms managing assets of more than $130 trillion that commit to reducing greenhouse gas emissions to zero.”
The author believes that fixed income markets will be the most important for financing climate solutions. Part of the reason is its scale, and part is because many projects, with steady cash flows over long periods of time, lend themselves to debt financing. One important area is that of “green bonds”, the market for which is described as “red hot”. In 2021, $500 billion in green bonds were issued. Other innovations in fixed income investing include lease securitization and solar loans.
Several times throughout this book, we read estimates of the costs of the necessary climate solutions. The various figures can be confusing, but they all broadly agree with a Boston Consulting Group estimate of what it takes: between $3 and $5 trillion a year. This enormous level of investment is a huge step up from where we are today (spending about $600 billion a year, according to Usher). However, the investment is necessary, especially as other possible responses to climate change can be convincingly rejected. (These alternatives include adaptation and control of population growth.)
One welcome aspect is that the general tone of the book is optimistic, with a focus on solutions rather than resorting to despair. Sometimes, however, this approach means overlooking certain risks to climate goals. For example, cattle contribute materially to greenhouse gases (in the form of methane), but aside from references to the success of Beyond Meat, the author offers us few solutions to the cattle issue. Similarly, he says little about how to mitigate the emissions generated by cement production. Furthermore, while he writes that “perhaps the biggest challenge in reaching 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 battery storage systems. . The author makes it clear, however, that his aim is not to describe all possible solutions to the climate crisis, but rather to focus on the implications of climate change for investors.
Investing in the Age of Climate Change it draws on a wide variety of sources and is well researched and very easy to read. Some readers may be familiar with much of the material, but for others it may be an inspiration to invest in climate change mitigation, in pursuit of both investment opportunities and our collective future.
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All messages are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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