Recently, world leaders are gathered in Glasgow, Scotland for the COP26 conference. Organizers have laid out some ambitious goals, including scaling up climate finance, among others. These negotiations are critical because the world is on track to blow right past our goal of limiting global warming to 1.5° C — and the potential consequences of inaction are immense.
As individuals, it’s hard to grasp what we can do to help tackle the enormity of the challenge that lies ahead. For example, the tools an individual has — such as buying local produce, installing solar panels, and recycling — can only make a significant difference when performed by millions or billions of people.
As investors, we have a bigger, and arguably more effective, tool at our disposal: money. And lots of it. If you look solely at the capital currently invested in donor advised funds and foundations — funds already earmarked for charitable purposes — there is over $1 trillion available for investment. That kind of money can help move the needle — and quickly. And it’s an ideal source of potential funding for a new wave of social entrepreneurs and fund managers who are currently seeking capital to build renewable energy grids, restore critical ecosystems, and develop technology to pull carbon out of the air.
Here at CapShift, we’re in the business of helping investors incorporate impact investments into their portfolios. Climate-focused investments are made with the intention to mitigate climate change, build resiliency to the effects of climate change, and position a portfolio to protect against climate risks and take advantage of climate opportunities. And in working with asset owners who are committed to investing in climate solutions, we’ve identified three common approaches they are building into their portfolios, which we call the ABC’s of climate investing.
Align. A common starting point for many investors is to integrate climate goals into their liquid, diversified, publicly traded portfolios. It includes strategies such as divesting from fossil fuel companies, investing in companies with thoughtful and measurable climate practices, and/or engaging with portfolio companies to advocate for environmental policies. Investments that move the needle in this category include climate-focused shareholder engagement and new green bond issuances.
Build. Investors can also develop, build, and deploy climate solutions directly through private investments targeting market-rate returns. These solutions span asset classes and impact areas, ranging from climate-resilient infrastructure to agriculture technology to sustainable forestry.
Catalyze. Finally, the most impact-minded investors can target solutions that otherwise would not be broadly supported by return-maximizing investors. These investments tend to feature higher risks or lower returns than the market can bear, and include solutions such as loans to climate refugees, pre-seed clean technology innovations, and clean water infrastructure.
These ABCs can be incorporated independently, or they can work in concert to form a 100% climate-aligned portfolio, which can be tailored to meet individual investors’ unique financial risk, return, and liquidity needs. In fact, we just published a climate investing primer, which includes more details on this framework, and how investors can use it to start their climate investing journey today.
We have an immense opportunity to use our investments to help turn the tide on the climate crisis. The planet needs you. And we are running out of time.
