The UK, in partnership with Italy, is hosting the 26th UN Climate Change Conference of the Parties this month, as the world faces a pivotal moment in the fight against global warming. It is becoming increasingly clear that the commitments famously made at COP21 in Paris six years ago will not come close to limiting heating to the desired 1.5 degrees Celsius.

In August, the Intergovernmental Panel on Climate Change issued its starkest warning yet. Without drastic action, temperatures will rise by up to 4 degrees over the historical baseline before the end of the century. A 1.5 degrees rise would lead to 2.4 times more frequent droughts and a 1.5-times increase in extreme precipitation; with a rise of 4 degrees, those risks would roughly double to 5.1 and 2.8 times respectively, at which point many parts of the world would become uninhabitable.

There is little doubt, then, that the decisions made at COP26 and implemented over the course of the next decade will determine our success in overcoming the defining challenge of our era. Solutions will need to be bold and far reaching, encompassing everything from accelerating the phasing out of coal and the curtailment of deforestation to electric vehicle rollout and greater investment in renewables.

At the same time, attention must be paid to mitigating the devastating effects of the climate change that has already taken place by restoring ecosystems and by building defences, warning systems and resilient infrastructure to prevent the loss of homes, livelihoods and even lives. Fulfilling these objectives will require innovation and ingenuity. It will also require funds – trillions of dollars, both public and private, will need to be unleashed to secure global net-zero.

The scale of the task is daunting. Yet the world may have an additional weapon in its armoury, which was only just emerging when the Paris Agreement was signed. That weapon is impact investing.

Evolution of impact

Impact investing has, of course, been around for far longer than six years. But the origins of the asset class lie in microfinance and social enterprise. The shift towards the greatest imperative of our time is a more recent phenomenon. Yet impact has also gained scale.

A rich ecosystem of impact specialists, often targeting the most disruptive environmental technologies, have been joined by impact initiatives launched by many of the world’s biggest asset gatherers, which are ready to scale those breakthroughs. Impact strategies now combine good intentions, robust metric frameworks and investment discipline with financial clout – $715 billion as of the end of 2019, according to the Global Impact Investing Network.

“Nearly every day, we are confronted with the impacts climate change is having on our world, from extreme weather events, water scarcity issues, and ecosystem collapse to agricultural disruption, ocean acidification and desertification,” says Ken Mehlman, co-head of KKR Global Impact. “As investors, we have an integral role to play by injecting much-needed capital and resources to help solve these issues at a global scale.”

KKR closed its $1.3 billion Global Impact Fund in 2020. Climate action is one of the vehicle’s four investment themes.

“By investing in companies that provide solutions to managing environmental impacts and climate adaptation and/or mitigation, as well as those facilitating the energy transition and sustainable living, we have an opportunity to secure our planet’s health for the near term and for future generations,” Mehlman says.

“We’re in the late innings of the climate crisis, but still in the early innings of investor innovation,” adds Michael Etzel, partner at impact consultancy The Bridgespan Group. “We need credible climate investment strategies of all flavours, from early-stage venture capital investments to take on fundamental technology risks to growth equity investments to scale promising products and services, and infrastructure investments to build capital-intensive solutions.”

Climate change, equity and inclusion

Impact investors’ contribution to combatting climate change extends beyond environmental imperatives.

The holistic mindset the investment class brings means it has a critical role to play in ensuring the transition is also equitable and just. Where a mainstream investor might focus exclusively on increasing renewable generation, or bringing a new technology to market, impact investors will consider the asset in the round, also taking socioeconomic and other welfare issues into account, and often guided by the United Nations’ Sustainable Development Goals.

“We have the opportunity here to build entirely new industries as part of this shift towards a more sustainable economy,” says the Global Impact Investing Network’s CEO and co-founder, Amit Bouri. “It is important that we prioritise doing so in an equitable manner. We know that the worst impacts of climate change fall disproportionately on lower income populations, ethnic minorities and women. Investors targeting the energy transition must also think about how to integrate equity considerations.”

“An area often overlooked by traditional markets is the effect climate change is having on societies, where the poorest populations are the most exposed,” adds Nuveen’s co-head of impact investing, Rekha Unnithan. “Climate change could result in more than 100 million additional people living in poverty by 2030.

“We invest to build social resilience to climate change among low-income communities globally. We do this by financing climate-smart agriculture, investing in disease prevention, helping families save for a rainy day and alleviating rent burden.”

Investment landscape

After all, securing a future for our planet will involve halving global emissions over the next decade. Yet it was only in the midst of the covid crisis in 2020 that emissions fell anywhere close to the level we will need to sustain.

Continued investment in a global backbone of carbon-displacing renewable generation is therefore crucial. But climate change objectives will not be met by investment in renewables alone. Success will also rely heavily on technological advancements in harder-to-abate sectors. The International Energy Agency anticipates that close to half of CO2 emissions savings beyond 2030 will come from technologies that are still under development.

The IPCC, meanwhile, has explicitly stated that engineered solutions must form part of our battle plan. And this is where impact investors, backing purpose-driven businesses, have a particularly important role to play. “It is clear that large-scale engineered solutions are now critical,” says Mátyás Csiky, ESG and sustainability at Partners Group, which launched impact-at-scale strategy PG LIFE in 2018. “We live in a world now where those have to be part of the equation.”

Quyen Tran, the head of sustainable investing research for fundamental equities and the director of impact investing at BlackRock, adds: “Impact investing can play an essential role in addressing climate change because we are effectively investing in innovation, including disruptive business models and technologies that can drive positive change for people and the planet.

“We need far more solutions than we have… to address climate change goals. Impact investing is a pathway that bridges that imbalance by strategically supporting innovative business models and disruptive technologies tackling climate change.”

“A lot of attention is being paid to how we can decarbonise large companies,” notes Amit Bouri, GIIN’s chief executive and co-founder. “That is critical but is not something I would characterise as impact investment. Developing the tech-based and nature-based solutions that will help us draw more carbon out of the atmosphere, offsetting the emissions still being produced, is also vitally important. And it is there that I think impact investors, with their disciplined approach to putting capital to work to drive positive outcomes, can have a meaningful effect.”

Bouri points to the impact industry’s responsibility to articulate a broad menu of investment needs that extend well beyond the large-scale renewables projects that have historically dominated many sustainable investment agendas. In particular, he alludes to community wind farms and household solar, as well as nature-based solutions such as sustainable agriculture and forestry.

“Then we also need to think about technology solutions,” Bouri says. “There has been a lot of interest in electric mobility, of course, but again, we need to go further. We need to think about how new technologies can help reshape the way we produce building materials, for example. There is a huge amount of capital required now, if these industries are to scale in time to meet 2030 targets.”

KKR’s Global Impact fund, for example, has invested in businesses such as GreenCollar, a carbon abatement project developer in Australia, which provides carbon credits by engaging with farmers, including those from indigenous communities, to develop sustainable agriculture strategies that result in improved biodiversity, reduced nitrogen and phosphorus use, and reduced emissions.

Partners Group, meanwhile, is looking at investments in carbon capture and sequestration that remove and permanently store CO2 emissions. “It is an area we started looking at a few years ago and which we believe has huge potential,” says Csiky.

Impact and influence

In addition to targeting potentially transformative new solutions and then growing those to commercial scale, impact has another key advantage in the fight against climate change – the ability to influence the wider economy. This is because, while investment in clean technologies is rising, it is important that these do not become siloed in discrete product categories, but rather facilitate the wholesale redesign of entire sectors.

“We have seen first-hand how impact investing – with its tangible outputs and proven change – attracts additional investment into sustainable causes from investors worldwide,” says Rekha Unnithan, co-head of impact investing at Nuveen. “In many cases, impact investing is the main entry point to investing in sustainability. This alone is critical to directing needed capital to address climate change.”

“One of the biggest achievements you can have as an impact investor in purpose-driven companies is to create ripple effects throughout industries,” adds Csiky. “Competitive dynamics mean you encourage other companies in the sector to make positive change. You may even pave the way for them.

“Just look at the solar [photovoltaics] industry. In the early stages, costs were high, but today those costs have come down so that solar is now on a par [with], if not less expensive than, fossil fuels. Impact investment can have that same catalysing effect.”

Partners Group applies the same ethos within its own organisation, taking learnings from PG LIFE and extending those throughout its wider portfolio.

“We cannot leave the fight against climate change to purpose-driven businesses,” Csiky says. “Everyone from the cement industry to the oil and gas majors, with their trillions of dollars and hugely clever individuals, needs to be involved. We need to connect the dots between impact and non-impact in order to push the whole economy forward.”

Collaborative approach

Although impact has an integral role to play in mitigating climate change, it is just a small component of the bigger picture.

“A systemic problem requires a systemic solution,” says Bouri. “The climate crisis clearly requires far more than a purely impact investment approach. It will require a shift in government policy, corporate behaviour and personal consumption, things that lie beyond impact investors’ sphere of influence. It is important both that impact investors see themselves as part of a broader systemic effort and that other actors recognise the role that impact investors are playing in the overall solution.”

“Climate change is a crisis beyond the scope of markets alone,” says Etzel. “We need every tool in the chest to make progress here: public policy, corporate leadership, private impact investment and philanthropy.”

As BlackRock’s Tran explains, impact investing alone cannot solve the effects of climate change.

“Unfortunately, climate change will exacerbate the struggles already faced by many who are underserved in our communities in every region of the world,” she says. “We must recognise that to succeed, we must collaborate with many other practitioners, including governments, non-profits, climate scientists, academia and other stakeholders.

“The only way to succeed here is through ongoing collaboration, innovating together [and] sharing lessons learned and best practices through systematic feedback loops as we continue to innovate and engage.”

Are you an optimist?

Impact experts share their views on whether the world will reach climate change targets.

“Christiana Figueres, the former executive secretary of the United Nations Framework Convention on Climate Change, coined the term ‘stubborn optimism’ in her book The Future We Choose. Essentially, what it means is that if we allow ourselves to wallow in the negative, then we may as well give up. I think it is critical that we remain positive, therefore, and I am a positive person by nature. That said, I believe the science suggests we have now missed the 1.5 degrees target and are heading for 1.7 degrees or 1.8 degrees at best. Even those targets will require a great deal of effort, but I am hopeful that effort will be forthcoming. In short, yes, I am an optimist. Because we have to be.”

Mátyás Csiky, ESG and sustainability at Partners Group

 

“I live in Northern California, where it feels as though half of the state is on fire and so, from a personal perspective, I believe hitting these climate change targets to be imperative. You only need to look at the natural disasters occurring across the globe to realise that we have to figure this out. A major component of the solution will be carbon reduction, of course, and the conversations I see taking place between CEOs and investors do give me cause for optimism. We have a good starting point. But there is undoubtedly still a lot of hard work to be done if things are going to be different this time around.”

Paul Yett, director of ESG and sustainability at Hamilton Lane

 

“New York has just been hit by horrific storms, and I grew up in California, which is being devastated year after year by wildfires. So, this feels like a visceral moment when it comes to the effects of climate change. What excites me is the depth of financial resource, human capability and technology that we have to tap into. That gives me a lot of optimism. But we are facing a moment of truth right now. The question is: will we make big enough, bold enough moves in time to frontload the investment we need today, in order to deliver the outcomes we want by 2030?”

Amit Bouri, CEO and co-founder at the Global Impact Investing Network