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February 08, 2013

Climate Change Outpacing Green Investment
    by Robert Kropp

A report from the World Economic Forum outlines the steps necessary to encourage the unprecedented shift in investment strategies that is necessary for sustainable growth.

SocialFunds.com -- More than most of the major actors in the rapidly unfolding climate change crisis, sustainable investors have sought to call corporations to account for unsustainable business practices and advocated for effective legislative and regulatory measures. In large part as a result of the efforts, assets allocated to sustainable investment strategies have continued to increase throughout the past decade.

In the US, a noteworthy development identified by US SIF: The Forum for Sustainable and Responsible Investment in its 2012 Report on Sustainable and Responsible Investing Trends in the US has been the growing number of money managers "using positive or inclusionary strategies or ESG (environmental, social, and corporate governance) integration" in their investment strategies. As Cary Krosinsky wrote in his foreword to Evolutions in Sustainable Investment: Strategies, Funds and Thought Leadership, "Take a purely values-based approach, and you risk missing the very same practical opportunities in eco-efficiency and innovation, where the sustainability we require will come from."

Yet exclusionary screening remains the primary investment strategy in the US. Meanwhile, as a new report from the World Economic Forum (WEF) points out, "Greenhouse gas (GHG) levels are rising amid growing concerns that the world is moving beyond the point at which global warming can be contained within safe limits."

The report, entitled The Green Investment Report - The ways and means to unlock private finance for green growth, warns, "Investment-grade public policy is an important prerequisite to engage the private sector." It has been estimated that private investment will have to account for as much as 85% of the transition to a low-carbon economy. "Public financial institutions need to more actively engage private investors," the report states.

The report does record some developing success stories, albeit on a small scale, in the public financing of such a transition. Developing nations, many of which are expected to be hardest hit by climate change, have been scaling up their green investments at a rate that significantly exceeds that of the member nations of the Organization for Economic Co-operation and Development (OECD). "Clean-energy asset financing originating from developing countries in 2012 is on track for the first time to exceed those originating from developed countries," the report states, noting that most of the financing has been encouraged by government policies.

Globally, however, "Progress in green investment continues to be outpaced by investment in fossil-fuel intensive, inefficient infrastructure," according to the report. "Legacy fiscal measures such as fossil-fuel subsidies combine with the slow progress of international climate negotiations to weaken market signals that might otherwise incentivize green investment."

About $5 trillion per year through 2020 is required under a business-as-usual scenario to promote global development. But even that amount will not be sufficient to effectively address climate change. To limit the global average temperature increase to 2C above pre-industrial levels, an additional $700 billion per year will be required.

Existing evidence demonstrates, however, "that the targeted use of public finance can scale up private financial flows into green investment through measures such as guarantees, insurance products and incentives, combined with the right policy support," the report argues. "There is strong potential for increased lending, advancing and rolling out de-risking instruments, using carbon credit revenues, and targeting grant money combined with technical assistance to attract much greater private investment."

However, private investors are not off the hook until such time as perfect government policies are in place. They need to take a new approach, the report advises. "Private investors do not need to wait for public policies or subsidies to remove all material risk," the report states. "The rapid pace at which green solutions are developing is an ideal opportunity for investors to enter a growing market."

Citing the recently formed Global Investor Coalition on Climate Change, an international coalition of climate change investor networks, as a potential source of leadership, the report argues that a more explicit factoring of climate change into long-term investment strategies could help unlock greater private investment in a green economy.

With $71 trillion in assets under management, pension funds and other institutional investors have important roles to play in the transition to a green economy. "Successfully mobilizing institutional funds in equity injections can be achieved through complex financial engineering by providing the investor with a 'quasi fixed-income position,'" the report states. "A fixed-income position can provide the investor with long-term returns in line with their investment strategy and risks."

Nevertheless, the report warns, "To ensure growth is sustainable, an unprecedented shift in long-term investment is required from conventional to green alternatives."

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