For Investors

Investors do not directly ‘emit’ carbon in the same way that energy or agricultural companies do. But all their investments do have a carbon footprint, often a big one.

Investors decide where large sums of money are invested, including in fossil fuel exploration or in companies with a large environmental impact. So investors are financing activities which have high levels of carbon emissions, for example through energy production or deforestation.

The ‘emissions intensity’ of investments made in the year is one way to understand current global emissions. But it can also be used to forecast future emissions because investments often have a long life. Track where the money is and you know what the carbon is.

Since investors are so critical to funding global carbon emissions and climate change, they are under pressure to make investments that are aligned with a less than 2oC emissions pathway, the globally agreed climate target.

The carbon bubble

There has been lots of analysis on the potential financial risk from investments that would lead to a pathway of emissions above 2oC or alternatively that would no longer be needed in a less than 2oC world where clean technology was common. Such emissions intensive assets would be stranded in these scenarios. And the value of related stocks and companies and their shareholders – institutional investors, pension funds, mutual funds – will all be affected.

The think tank The Carbon Tracker Initiative has coined the term the ‘carbon bubble’. This relates to fossil fuels that have been discovered but are ‘unburnable’ if we are serious about keeping warming below 2oC.  According to the International Energy Agency, no more than a third of the current fossil fuel reserves can be burned if we are to stay below 2oC1. This means that two thirds would have to be ‘kept in the ground’.

A changing tide

A changing tide
All of this puts a spotlight on investors, asset owners and asset managers and how they manage climate change risks in their portfolios.

  • Risk disclosure: Some investors require companies they invest in understand their climate risks and disclose emissions and future strategy. The Institutional Investors Group on Climate Change, a large group of investors representing trillions of dollars, have engaged with the most emissions intensive sectors they invest in to ask for a ‘2oC stress test’.
  • New indicesIndices are appearing which only include companies that provide solutions to climate change, helping investors weight their investment to a lower emissions pathway.
  • Shareholder resolutions: A wave of shareholder resolutions on climate change have occurred in the extractive and utilities sectors. In 2016, a resolution against Anglo American, prepared by the ‘Aiming for A’ coalition, called for actions to build strategic resilience for 2035 recognising the risks and opportunities from climate change; shareholders overwhelmingly passed it with a 96.25% vote.
  • Divestment: Some investors are choosing to halt investment in sectors like coal or other fossil fuels. Norway’s $900 billion government pension fund, the largest sovereign fund in the world, is selling off its investments in companies that rely more than 30% on coal. A CERES initiative, ‘Clean Trillion’, aims to drive $1 trillion a year into clean energy.
  • Green bonds: There is a fast-growing market for ‘green bonds’ which funds projects with additional environmental and social benefits and saw $42 billion issued in 20152.
  • Direct shareholder activity: Groups like ShareAction empower people to take action to influence companies they are invested in and exposed to, like their pensions.
  • Sustainable land-use coalitions: Coalitions to encourage more sustainable land-use practices and the preservation of ‘natural capital’ have been formed, such as the Natural Capital Coalition. This shows the focus is not all on fossil fuels; it’s also on emissions from land-use – deforestation in particular.

Climate risk disclosure

With such huge risks to the global economy, there is increasing pressure for businesses to respond and to disclose the risks and opportunities of climate change for their business. Notably, the global Financial Stability Board has set up a Task Force to develop recommendations for ‘more efficient and effective climate-related disclosures’. Read more about the work of this task force here.

Many companies already disclose their climate change risk through the CDP  (formerly Climate Disclosure Project) each year; reporting their operational and product emissions, as well as any investments in emissions reductions or carbon credits they have made to offset their own or their product emissions.

Investors and companies will need to start to look very closely at the overall strategy, governance and risk management relating to climate change and will be expected to set, track and report useful targets and metrics which align with a lower emissions pathway.

The role of carbon credits

Investing in carbon credits has a vital role to play in providing a lower-cost path to lower emissions, either for investors or for companies. Companies can develop ‘carbon neutral’ products or invest in carbon credits as a more cost-effective alternative to reducing emissions in their own operations. Carbon credits can also be ‘inset’ into investment strategies, by companies ensuring there is no deforestation in their supply chain. Investors are also starting to consider direct investment in carbon credits, to balance out their investments in high-carbon sectors.

There are also some innovative bonds on the market that include carbon credits from forestry. International Finance Corporation, in conjunction with the Australian coal company BHP Biliton and Bank of America Merill Lynch issued a financial bond which pays out the interest in forestry carbon credits.

At Ecosphere+

At Ecosphere+ we work with companies in the financial and non-financial sectors on how to integrate carbon mitigation into their overall strategy with forestry carbon assets. We can offer straight-forward purchase agreements or access to more structured products such as a forest bond. We are also developing new and innovative ways to finance forest carbon and deliver a lower net emissions pathway.

Investing in forest carbon projects like ours can also help companies make progress and impact in other environmental and social areas which are of importance to them or their investors such as indigenous rights, gender equality, biodiversity and ecosystem services. Read more about how our projects are helping achieve the Sustainable Development Goals.

Get in touch today to see how we can help you.

[1] International Energy Agency (2012) World Energy Outlook
[2] Climate Bonds (2016) Explaining Green Bonds