How to invest in climate change?

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Investing in climate change is not just a financial opportunity. It is also a chance to actively address humanity’s greatest challenge by tackling the climate funding gap. It is the idea that, while we know of the solutions needed to reduce emissions and mitigate the damages from global warming, we’re not funding these solutions. Climate investing consists in giving financial resources to organizations that contribute to fighting global warming. 

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How to invest in climate? There are a multitude of Environmental, Social, and Governance (ESG) assets that you can invest in. We hear about climate tech, climate change stocks and green finance everywhere. However, what is tricky is to find investment opportunities yielding both financial returns and having legitimate climate impact. For optimum environmental effect, consider investing in European carbon allowances. They contribute directly to reducing carbon emissions, promoting a low-carbon economy.  

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• Invest in climate: Your money has an impact on society
• Climate change investments: What are your options?
• What is climate fintech?
• Why does the EU ETS offer an effective climate investment opportunity

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Invest in climate: Your money has an impact on society

Investing choices can shape broader social trends - where our money goes has an impact on climate change, ethical practices, and economic growth.. The world that gets built tomorrow is the one that gets financed today. The project or company that receives investments use it to grow their activities. So, by financing them, we facilitate their activities. This is why climate investments are crucial. Individuals should contribute to fighting global warming through their financial decisions. That is the idea behind ESG finance. 

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ESG: Environment 

The production and consumption of goods produces CO2 emissions, leading to global warming and climate change. The extent of resource depletion, waste generation, and deforestation, among other consequences, is related to the amounts of carbon produced by the activities we opt to support financially.

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ESG: Society 

A company has a say in working conditions, labor rights, diversity… Those aspects matter - they reflect broader social values and help address imbalances in living standards. So, when deciding where to allocate our money, it is a good idea to check if their social values align with our own views. 

ESG: Corporate Governance

Let’s make sure that the projects we finance are fighting against bribery and corruption, tax evasion, abnormal shareholders’ voting rights. Effective corporate governance ensures the alignment between the company, its employees and public entities.

One problem that immediately comes to mind is the vastness of considerations falling under the ESG umbrella. There are hundreds of ESG reporting provisions with different definitions of sustainability.

Climate investments: what are your options? 

Investing is buying something with the will of selling it at a later time, hopefully at a higher price. This definition is very broad - and adding the “positive climate impact” aspect does not help much to make things specific. There are a multitude of climate investing ESG assets that one can choose from. Renewable energy stocks, climate bonds, ESG funds, sustainable index funds… McKinsey estimates that globally, investors can participate in a market of $9 trillion to $12 trillion in annual investments by 2030 to fight climate change.

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What are the climate assets?

Some examples of climate investment assets are: 

• Green bonds: debt instruments issued by governments, municipalities, or corporations to raise funds for projects with environmental benefits.
• Green equity funds: investment funds that focus on companies deemed environmentally responsible and sustainable. Investors contribute capital, and the fund invests in stocks or equities of those businesses. 
• Carbon allowances: permits issued by governments or regulatory bodies, limiting the amount of greenhouse gases the industry can emit. They can be traded in the carbon market, providing a financial incentive for companies to reduce their emissions and promoting a shift toward cleaner practices. You can purchase such allowances with Homaio.‍

The evolution of sustainable finance

Green finance has evolved significantly over the years, starting with the introduction of socially responsible investing in the 1970s. Then, it gradually progressed to the development of dedicated green bonds in the mid-2000s. More recently, climate finance has seen an increased focus on more complex sustainable investment strategies. There is a growing demand on transparency and environmental impact measurement in response to the escalating global awareness of climate change. At the same time, the complexification of investment strategies has led to more opacity and technicality in the products offered. 

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What is climate fintech?

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Climate tech? Climate finance? Climate fintech? We often hear about these ideas but might not take the time to understand what they really mean. However, it's important to do so because these concepts reflect larger social and political issues. For example, in 2022, they hit a record high at $2.9bn (2.4 times more than in 2021). Those investments fell in 2023 due to the prevailing macroeconomic uncertainty and geopolitical conflicts. 

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What is the difference between climate tech and climate finance? 

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"Climate tech" involves developing technologies to tackle climate change, like renewable energy. Humanity needs to explore new production mechanisms for a more sustainable functioning. On the other hand, "climate finance" is about funding projects and initiatives that address climate issues, such as supporting eco-friendly projects or building climate-resilient infrastructure.

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How are climate tech and climate finance related? 

Climate tech and climate finance work together to combat climate change. Climate finance gives the funds and tools needed for climate tech to succeed. The more financial and human capital directed to climate finance, the better the opportunities for climate tech. Read here the UN article on how important it is to finance climate action, going through the examples of Nepal, Cambodia, Egypt… Climate tech produces innovations, and climate finance steps in to fund and scale up these solutions.

Why does the EU ETS offer an effective climate investment opportunity

We’ve looked across geographies and asset classes for a financial product that delivered convincingly on both impact and returns. And we found the EU ETS to do this better than most. It’s a massive, liquid market which appreciates by design and has a successful track record at reducing emissions. 

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The general principle of the EU ETS to fight climate change

Investing in carbon allowances is effective for the environment as it puts a price on carbon emissions, encouraging companies to reduce their greenhouse gas output. They are forced to stay within their allocated limits. This market-based approach incentivizes businesses to adopt cleaner technologies and practices, ultimately contributing to a decrease in overall carbon emissions. 

Is climate investing always bringing reliable impact?

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Some climate investing assets may have doubtful impact due to issues such as greenwashing. Investments can be promoted as environmentally friendly but lack substance or real impact. You can read more about it in our article here. This logically leads to skepticism about the actual effectiveness of climate investing in addressing climate change. It's crucial for investors to scrutinize the transparency, authenticity, and measurable impact of climate-related investments. The EU ETS is a regulated, transparent market with close to two decades of data that was built specifically to reduce emissions at scale. 

Investing in climate is more effective through carbon allowances rather than other assets

Investing in carbon allowances is often deemed more effective than other supposedly green financial assets because it directly targets and limits carbon emissions. It provides a tangible and measurable impact on the environment. Unlike some green financial assets that might support environmentally friendly initiatives indirectly, carbon allowances create a clear economic incentive for companies to reduce their carbon footprint. This market-driven approach leverages economic forces to drive real and immediate changes in behavior, making it a more direct and impactful strategy for addressing climate change. Pricing emissions is widely considered to be the most effective mechanism to reduce emissions by economists, scientists, politicians and investors. 

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Sources:

Commerz Ventures, 2023. Climate Fintech - FinTech driving net-zero continue to attract record VC funding.

KPMG, 2020. Green finance - Emergence of new green products to fund decarbonization.

McKinsey, 2023. Climate Investing: Continuing breakout growth through uncertain times

The Journal of impact and ESG investing, 2020. From SRI to ESG:The Origins of Socially Responsibleand Sustainable Investing

The World Bank, 2015. Green Bonds Access Investor Capital to Fight Climate Change