How Climate Change Will Drive A Fundamental Reshaping of Finance

Extreme weather conditions and natural disasters have swept through the world this year. From bushfires in Australia to flooding in the U.K., the climate catastrophe is pushing sustainable investing to the forefront.

BlackRock BLK CEO Larry Fink said concerns about climate change will drive a "fundamental reshaping of finance", and the shift will happen "sooner than most anticipate,” according to the BBC. The company has increased the number of "sustainable" investment products available to meet the demand from clients.

Rising food prices, droughts, commodity shortages, extreme flooding and coastal erosion will wipe trillions from economies around the world if the global environmental crisis is not dealt with, said Katie White, executive director of advocacy and campaigns at The World Wide Fund (WWF).

“We are destroying our planet and our economic future. We need urgent, global leadership and immediate action to change the way we use land, to invest in the restoration of nature, to cut emissions and critically to stop destroying forests for food production," she said. 

The decline of natural assets will cost the world at least 368 billion pounds ($479.6 billion) /a year, adding up to almost 8 trillion pounds by 2050, according to the WWF's Global Futures report.

It is estimated the U.K. will suffer some of the biggest financial losses — third behind only the United States and Japan — taking an annual hit to its economy of at least 16 billion pounds by 2050. The main economic costs will be caused by the loss of natural coastal protection services leading to flooding and erosion, as well as declining fish stocks harming the fishing industry, the report said.

ESG Investing

The ethical investing trend is an area that is rapidly growing and coming under scrutiny.

It's known by various names: Environmental, Social and Governance (ESG); Sustainable and Responsible Investments (SRI); and impact investing.

Who doesn’t want to profit and do good at the same time? Last year was a huge year for impact investing, with the millennial and Generation X demographics taking an increasing interest.

The Greta Effect

Greta Thunberg started an international youth movement promoting climate change.

"People are suffering. People are dying and dying ecosystems are collapsing. We are in the beginning of a mass extinction, and all you can talk about is the money and fairy tales of eternal economic growth," she said as a guest before the United Nations.

"How dare you! For more than 30 years the science has been crystal clear. How dare you continue to look away and come here saying that you're doing enough when the politics and solutions needed are still nowhere in sight."

When it comes to investing, returns are just as important as doing the right thing.

Investors need to scrutinize the wide array of investments on offer before jumping in and falling for the hype. Sustainable investing is made with the intention of generating measurable social and environmental impact alongside high financial returns.

As ESG investing grows in prominence, many ETFs and mutual funds are becoming better at incorporating the standards. For example, ESG funds that offer access to certain stocks will have to meet certain environmentally friendly criteria. But many of these funds will lag when it comes to potential returns.

In 2019, there were a record number of exchange traded funds launched as issuers jump on the socially responsible investing bandwagon.

Most of these ETFs have yet to yield positive returns. Data shows that assets under management in ESG funds is continuing to grow.

“Many of these ESG ETFs are relatively young and have not had a chance to prove if they can demonstrate strong performance,” Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, told the Wall Street Journal.

Lack Of Industry Consensus

A lack of industry consensus on how to properly define ESG investing terms has complicated tracking trends in asset growth, according to Vanguard.

“Differing local terminology, investor preferences, and disclosure requirements have contributed to the absence of a global reporting standard for assets managed using some form of ESG investment approach. Asset estimates can look quite different depending on what is included, which may not always be clear without close examination,” the firm said.

It is worth noting that ESG investing is not a new concept. Vanguard pinpoints the growth in assets to the establishment of responsible investing initiatives and regulatory changes back to 2006,  when the United Nations formed the Principles for Responsible Investment.

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