Say Yes: How climate-smart investors can do more business

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Climate risk conversations often revolve on what investors shouldn’t do.  Don’t finance non-Paris Agreement-aligned companies.  Don’t underwrite long-dated oil and gas bonds.  Don’t sell mortgages to flood-risk properties.

It’s a schoolmarmy approach that more likely than not contributed to the ESG backlash in the US and elsewhere.  No-one likes being told they can’t do something – especially if that something is potentially lucrative.

Perhaps this is why sustainability advocates have shifted focus toward “transition finance” (a choose-your-own-adventure I’m skeptical about) and the idea of “accelerated phaseout” (buying fossil fuel assets with the express intention of closing them early).  These are about what financial institutions can do, albeit with strings attached.  Yes, you can finance that high-emitting company – so long as it has a credible transition plan.  Sure, buy that coal-fired power plant – just make sure to shutter it in five years, not ten.

It may make climate advocates leery, but this more permissive approach dovetails better with investor incentives.  One of the most convincing pitches I’ve heard from a climate risk analytics company was not: “we help you reduce your climate impact” but “we help you win more deals”.  If climate risk management is reframed as a way to empower banks and investors to finance more – and more lucrative – business, it can be a winner.

This framing is why I disagree with Tony’s recent article on climate risk and development projects.  He contends that developed world investors’ preoccupation with emissions limits and climate physical risk exposure – not to mention their regulators’ concerns about climate-related systemic risk – could get in the way of their financing projects in the developing world.  

In contrast, I believe a heightened understanding of climate risk – together with a big slug of public sector support – could actually incentivize rich world investment in poorer regions.