Book Review: Investing in the Age of Climate Change

The scientific consensus is that climate change is real, happening now, and potentially catastrophic. As a result, most countries are working to reduce their greenhouse gas emissions, with the goal of reaching ‘net-zero’ emissions by the middle of the 21st century.To realize reduction and innovation Large investments are required.

Columbia Business School’s Bruce Usher approaches the issue from an investor’s perspective. Investing in an era of climate change, He identifies both the impact of climate change on the investment community and how investment capital enables us to ‘save ourselves from ourselves’. The investor’s role, he says, is nothing less than “financing the future of the world.”

Earlier in the book, Usher describes technological developments (renewable power, electric vehicles, batteries, green hydrogen, carbon removal) that can mitigate the impacts of climate change. This discussion serves as a valuable introduction to later sections dealing with the impact of such climate solutions on the investment community.

One section identifies alternative strategies that investors can use.

• risk reduction
• divestment
• Environmental, Social and Governance (ESG) Investment
• Thematic impact investments (to finance projects that address specific environmental or social challenges such as climate change)
• Impact-first investing (where investors focus on solving social and environmental problems and are willing to accept below-market financial returns in exchange for greater impact)

Each of these strategies is suitable for certain types of investors. University endowments can choose from large divestment and ESG fund managers, specialist thematic impact investment managers, and impact-first investment philanthropists. Several approaches can help control risk. Others (according to Usher) can improve revenue.

Arguing that “all investors need to understand the opportunities and risks of investing in real assets that provide climate solutions,” the authors next turn to both financial and real assets. Real assets include renewable energy projects, real estate, forestry and agriculture. His analysis explores valuation issues associated with large-scale renewable energy projects, government incentives and expected rates of return (6% to 8% internal rate of return for solar and wind projects, (potentially higher returns on riskier investments). storage system).

The discussion of real estate is brief, but includes considerations such as flood and wildfire risks and the benefits of energy upgrades. The Empire State Building is an interesting example. The importance of carbon markets is explained in the chapter on forestry and agriculture.

The author’s analysis of financial assets includes chapters on venture capital, private equity, public equity, equity funds, and fixed income. Interesting examples of successful and unsuccessful investments are given, along with the following approaches for evaluating investments in the age of climate change.

• Is your company minimizing risk by reducing direct and indirect emissions?
• What effect will price have on carbon?
• Is the company an industry incumbent or a disruptor? If a disruptor, what are the chances of success?

The chapter on equity funds identifies the many types of climate-focused funds and exchange-traded funds (ETFs) currently available. This analysis covers the differences between low carbon funds, fossil fuel free funds and climate transition funds. Some of these funds are particularly large and successful, the authors say.

The fund’s successful launch is an example of how investing in climate action has become mainstream. The same is true for the creation of organizations like the Glasgow Financial Alliance for Net Zero. “A global coalition of 450 financial firms managing over $130 trillion in assets committed to reducing greenhouse gas emissions to zero.”

The author believes that the bond market will be the most important for climate financing. This is partly because of its size and partly because many projects with long-term, stable cash flows are well suited for debt financing. A key area is the market for ‘green bonds’, which has been described as ‘red hot’. In 2021, $500 billion of green bonds have been issued. Other innovations in fixed income investing include solar leasing and loan securitization.

Several times in this book I have read the cost estimates for the required climate solutions. The various numbers can be confusing, but they’re pretty much in line with the Boston Consulting Group’s estimates of annual needs ($3 trillion to $5 trillion per year). This enormous level of investment is a big step up from the current situation (about $600 billion in annual spending, according to Usher). But investments are needed, especially since other possible responses to climate change may be convincingly rejected. (These options include adaptation and controlling population growth.)

A welcome aspect is that the overall tone of the book is light and focused on solutions rather than resorting to despair. It can also mean For example, livestock has a significant impact on greenhouse gases (in the form of methane), but aside from mentioning the success of Beyond Meat, the authors offer little solution to the livestock problem.

Likewise, he says little about how to mitigate the emissions caused by cement production. Further, he writes, “Perhaps the biggest challenge to reaching net zero is the inability of countries to work together,” but how solutions such as battery storage systems depend on fragile global supply chains. However, the author notes that his goal is not to describe all possible solutions to the climate crisis, but to focus on the impact of climate change on investors. I am making it clear.

Investing in an era of climate change It is drawn from a variety of sources, is well-researched, and is highly readable. Some readers have pursued both, proving their inspiration to invest in climate change mitigation.