Climate change is shaping our future in many different ways. It is opening new approaches in financing activities too, as investing in projects that aim at reducing the carbon footprint of human activities has become increasingly crucial, both for the planet and for businesses. In fact, there are several opportunities in climate investing. Organizations that embrace climate investing can gain a competitive advantage by differentiating themselves from their peers and positioning themselves as leaders in sustainability. In recent years, there has also been a growing trend among banks to incorporate sustainability and climate considerations into their investment decisions.
Why should we consider climate investing
Climate investing refers to the practice of investing in companies, projects or funds that are working to reduce greenhouse gas emissions (GHG), mitigate the effects of climate change or adapt to its impacts. Climate investing can take many forms, including renewable energy projects, clean technology companies, sustainable agriculture, green buildings, carbon capture and storage projects.
Generally speaking, climate investing can drive economic growth by creating new industries and job opportunities, such as in renewable energy, energy efficiency, sustainable agriculture and other climate-friendly sectors. It can have a positive impact on society by supporting efforts to reduce greenhouse gas emissions (GHG), protect natural resources, promote sustainable development and a healthier planet.
More specifically, climate investing can support innovation by funding new technologies and business models that help mitigate and adapt to the impacts of climate change.
Climate investing is also a form of risk management: as climate change poses significant risks to businesses, including physical risks from extreme weather events and regulatory risks from government policies aimed at reducing greenhouse gas (GHG) emissions. Climate investing can help companies manage these risks, by promoting sustainability and resilience.
Sustainable finance is growing
Banks have started investing in a wide range of climate-related activities, including renewable energy projects, green bonds, sustainable infrastructure and energy efficiency initiatives. Some banks have also established dedicated climate funds or set specific targets for their climate-related investments. Many of them support climate investing indirectly, by providing financing, advisory services and other forms of support to climate-focused businesses or projects.
According to the latest Global Banking Annual Review from McKinsey, sustainable finance has grown fast, from almost nothing five years ago, to become a major theme for banks.Issuance of sustainable bonds now accounts for about 11% of the total bond market volume, while sustainability-related syndicated loans are about 13% of the global syndicated loans market volume. Financing clean energy marked the first phase of growth, but sustainable finance is now broadening and deepening.
For example, Bank of America has committed to investing and financing 300 billion dollars in sustainable finance activities by 2030. The bank has also established a Sustainable Investments Institute to conduct research and provide insights on sustainable finance issues. The European Investment Bank (EIB) has committed to investing 50% of its total lending in climate-related projects by 2025. The EIB finances a wide range of climate-related projects, including renewable energy, energy efficiency and sustainable infrastructure.
The Financial Times reported in July 2021 that sustainable funds in Europe attracted record inflows of 120 billion euros in the first half of the year, up from 68 billion euros in the same period in 2020.
The opportunities for banks
Through climate investing, banks can seize multiple opportunities, as the Global Alliance for Banking on Values points out:
- They can open up new business opportunities, as the demand for sustainable products and services continues to grow.
- They can enhance their reputation and positioning as leaders in sustainability, differentiating themselves from the competition and attracting new customers, who are increasingly focused on environmental and social issues.
- They can manage the risks connected to climate change in a more effective way and be more resilient during times of economic and financial instability.
- They can play a key role in driving the transition to a low-carbon economy and supporting global efforts to mitigate the impacts of climate change.
