Climate Impact vs. Capital Flows

October 31, 2021

Solutions for 50% of emissions are getting 10% of the capital

Hello from Impact Delta.

Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the focus (or lack thereof) of capital to address climate after COP 26.

Taking the long view -  Building on the massive increase in investing in artificial intelligence (AI) and machine learning (ML), Stanford University recently launched a Research Initiative on Long-term Investing. The concept behind this center is to help capital allocators better understand ESG metrics in financial risk terms. Traditionally investors have relied on backward-looking trends to identify and model risk; however, with no historical data on climate change, the traditional approach cannot work. By combining the latest in technological tools (sensors, AI and ML, large-scale scenario planning, etc.), the initiative will generate new value-at-risk tools to better align large, long-term infrastructure investing with ESG risk.  

But not investing in the right areas – On the back of the COP 26 meeting in Glasgow, Generation Investment Management released a research report that quantified where capital is flowing relative to its climate impact. It seems that progress is underway as roughly $130 trillion of investment capital has committed to net zero under the Glasgow Financial Alliance for Net Zero. This should be sufficient for the estimated $3 trillion of annual investment necessary to keep temperature rise below 1.5C. However, only $0.5tn is currently spent annually on clean energy, and the solutions for 50% of global emissions are only getting 10% of the capital. 

The kids won’t be alright – Distance learning for an entire year has many analysts concerned about lost academic performance for school children. The National Center for Educational Statistics recently released the latest data that is even more disturbing. From 2012 to 2020, test scores for 13-year-olds in both math and reading went down on average for the first time in 50 years. Equally concerning is the widening gap in performance between the lowest and highest performers. It will be interesting to watch if this trend can be reversed by the growth in education technology investments and innovative school solutions.

How green are your bonds? – With the green bond market reaching an estimated $750 billion in 2021, it’s not surprising that almost every company is seeking to tap into this financing. However, NN Investment Partners released a report that 15% of issuers are involved in controversial practices. Among the issuers this year are Saudi Aramco ($1.36B), Qatar Energy (~$2B) and the largest UAE bank (government owned), despite the UAE government owned oil company announcing it will invest to increase oil output by 25% by 2030. As green bonds have outperformed the broader bond index in 5 of the last 6 years, it will be interesting to see if these more controversial green bonds will perform similarly or diverge from other green bonds. 

Carbon Credits: A New Farm Product? As this recent New York Times article  discusses, global cropland has the potential to sequester up to 570 million metric tons of carbon dioxide per year. But there are many challenges to overcome, including the accuracy of today’s estimates of soil-based carbon removals, permanence, additionality, and regulation. Our partner Jim Bunch is quoted.

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About Impact Delta A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.

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