A Guide to Investing in Climate Change: Best Practices

Climate change is a civilizational challenge. And it requires a massive, sustained, and global reallocation of capital. However, finding the right investment opportunities - those that really contribute to reducing emissions - can feel like finding a needle in a haystack. 

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There are tons of acronyms, standards, types of products and asset classes, ever more complex and technical. Here, we’re giving you some tips and tricks to make sure your money really goes where it's most needed. And that you don’t fall in greenwashing traps or marketing gimmicks.  

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Thankfully, a positive development in recent years is that legislators around the world, like the European Commission in Europe or the Securities and Exchange Commission in the United States, recognize this as a formidable challenge. They are intensifying regulations to ensure transparency in climate finance and making sure your money really serves a purpose. 

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The EU ETS, as the backbone of the EU’s climate policy built progressively over the past twenty years, is a perfect example of a transparent market with a stellar track record. It is recognized as a climate change investment method that provides a direct and significant contribution to reducing emissions. Homaio enables investors to take part in this market, providing an effective strategy to align financial goals with meaningful climate action.

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- How to invest in climate change? 
- Impact investing: is it valid to be skeptical? 
- Climate investment assets are more and more regulated 
- Investing in climate action through the EU ETS

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How to invest in climate change?

Why invest in climate change?

Our future depends on what is financed in the present. Investing decisions play a crucial role in shaping our society and ecosystems. Investing in energy, industrial, and agricultural transitions is key to fighting global warming and reducing emissions. . Only by profoundly changing the way we produce energy, manufactured goods, and food will we have a chance at a more sustainable economy and society.

What does investing in climate change require?

This will require huge investments, both to reduce emissions (mitigation) and to dampen their effects (adaptations). These two ideas - mitigation and adaptation - are the backbone of climate finance. By massively allocating funds to mitigation and adaptation projects, investors support their ability to grow and thrive. Recognizing the importance of fighting global warming, individuals can contribute through climate finance - it is about aligning financial choices with our common environmental challenge. The best part is, you don’t need to sacrifice returns.

What are good climate change investments ?

If you want to redirect part of your wealth towards tackling humanity’s greatest challenge, a good place to start is to remember that climate finance encompasses two things: emissions abatement and warming mitigation:

Emissions abatement

Emissions abatement means reducing the amount of greenhouse gas that is emitted in the atmosphere. These gasses are the root cause of global warming. They come from three basic human activities : producing energy, manufacturing products, and growing food. For example, investing in solar panels or wind energy is a low carbon method for producing energy, so it’s a good climate investment. By reducing emissions, we make global warming less severe.

Climate adaptation

Climate adaptation means finding solutions to help ecosystems and societies cope with a warming climate. The earth has already heated up significantly since pre-industrial times, and whatever we accomplish over the next few decades, there will be tremendous damage to existing societies. We of course need to limit additional damage by investing in abatement solutions, but we also need to address existing damages by investing in adaptation.

How to invest in climate change?

Climate investments can be found in  various financial  instruments: 

• Green bonds  are debt instruments issued to fund environmentally beneficial projects by governments, municipalities, or corporations. In short, you’re loaning money to the project. In exchange, you receive a periodical coupon and eventually you are paid back the amount of your initial loan. 
• Green equity funds  are investment funds concentrating on environmentally responsible and sustainable companies. As an investor, you contribute capital for the fund to invest in the stocks or equities of such businesses. You yourself hold a share of the fund.,
• Green crowdfunding platforms give you access to projects directly without an intermediary like a fund or an institution. They can be either equity or debt instruments, 
•  Carbon allowances are issued by governments or regulatory bodies. They restrict the greenhouse gas emissions of industries and can be traded on regulated carbon markets. They’re a massive instrument of close to a trillion dollars in trading volume, but until now weren’t accessible to individual investors. That was a shame, as they are widely considered to be the most efficient way to reduce emissions. 

Who are the biggest climate investing players in the public sector?

Some of the key players in climate investing are development banks like the European Investment Bank or the Worlds bank - they allocate a lot of resources to financing green projects. Also on the public side, multilateral organizations (UN Environment Programme FInance Initiative or the International FInance Corporation) and national and regional initiatives play an important role. They drive green finance through policies, incentives and regulations like carbon pricing ETS.

Who are the biggest climate investing players in the private sector?

The private sector is also crucial to contribute to responding to the climate emergency. Asset management companies like BlackRock, Vanguard, or State Street are very active in this type of investments. Green bonds and other sustainable structured products are a main topic for leading banks like JPMorgan Chase and Bank of America. FInally, technology companies from the private sector like Tesla majorly contribute to the green finance ecosystem.

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Impact investing: is it legitimate to be skeptical?

The many definitions of investing in climate change

Unfortunately, the answer is a resounding yes. There are many definitions of a green investment, often remaining generalistic and vague. The OECD defines this concept as “Funds raised to finance or refinance “green” projects”. The IMF says that “a climate bond refers to bonds where the funds raised or the debt service are related to the achievement of environmental objectives”. A lack of a universal definition for green investments has led to numerous standards, multiple institutions, and various impact tracking tools, making it challenging to navigate through the diverse ESG reports and frameworks. Over the past few years, investigative journalists have shed a light on numerous greenwashing scandals, illustrating the opacity of the sector.

Green finance has many loopholes

Many supposedly sustainable solutions raise environmental reliability concerns - sustainability funds often invest in highly polluting industries. For instance, "Dark Green" funds, claiming international ethical values, were found to invest 46% in fossil fuels and aviation by an investigation performed by Le Monde. The opacity and doubt surrounding terms like "sustainable investments," "ESG finance," and "green wealth solutions" highlight the need for a substantial overhaul in the climate finance space.

Greenwashing is making investors doubtful on the green finance efficacy

A recent survey indicates rising doubts about the legitimacy of sustainability claims in finance. In 2023, 25% of high net worth individuals question the environmental friendliness of ESG funds (compared to 15% in 2022), and 23% consider ESG funds as "greenwashing" (up from 15% in 2022). This skepticism highlights a legitimate concern about verifying the true environmental impact of investments deemed environmentally responsible. 

‍Climate investment assets are more and more regulated 

Enhanced supra-national ESG investing regulation 

The growing emphasis on supra-national regulatory measures and reporting standards is seen through the creation of texts like the EU Sustainable Finance Disclosure Regulation (SFDR) or the Global Reporting Initiative (GRI). The former mandates disclosure of ESG integration by financial market participants and advisers to prevent greenwashing; the latter is widely adopted by companies for ESG reporting, contributing to increased transparency and accountability.

Enhanced national ESG investing regulation

Countries like Japan and the UK are enhancing national ESG investing regulations to promote transparency and responsible investment practices. In Japan, revisions to the Stewardship Code and Corporate Governance Code now incorporate stronger climate investing regulation elements. Similarly, the UK's Financial Reporting Council has introduced updates to place increased emphasis on integrating ESG factors into investment decision-making.

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Investing in climate action through the EU ETS  

A pure climate investing option with strong performance potential

The EU Commission aims to boost carbon prices by reducing the supply of European Union Allowances (EUAs) every year. Carbon market experts anticipate promising financial returns supported by these regulatory tailwinds. Over the past 10 years, the EU ETS has grown by 30% per year on average. . Analyst predictions indicate prices of EUR 93.85 and EUR 109 for the years 2025 and 2026, emphasizing the potential for significant value growth in the EU carbon market.

A pure climate investing option with demonstrated climate impact

According to the EU Commission, the EU ETS has contributed significantly to reducing emissions from power and industry sectors, achieving a 37.3% decrease below 2005 levels. In 2022, Member States allocated an average of 76% of their ETS revenue to support climate and energy initiatives, and now have the obligation to allocate 100%. With the 2024 expansion of the EU ETS scope to the maritime sector and the introduction of a new Emissions Trading System for buildings and road transport in 2027, carbon pricing is set to encompass three-quarters of EU emissions.

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Sources

The IMF, 2023. Sovereign ESG Bond Issuance
Le Monde, 2022. The list of 388 'Dark Green' funds that invest in fossil fuels.
OECD, 2021. Scaling up green, social, sustainability and sustainability-linked bond issuances in developing countries.
Saltus, 2023. Saltus Wealth Index Report