It’s now or never; no ifs, no buts. That is the code red warning in the sixth report from the Intergovernmental Panel on Climate Change, published in August 2021.
Under any policy scenario, the availability of talent, innovation and capital from the private sector holds the keys to leading the transition to a low-carbon world.
Historically, capital markets have been at the forefront of mega themes that reshape our economies and societies. And so, it is with climate change. Several private sector-led initiatives are already underway with the aim of aligning capital to sustainable markets and opportunities.
In fact, long-term investors have already been rechannelling trillions of dollars towards mitigation and adaptation activities in order to achieve the goals set by the Paris Agreement in 2015.
According to KPMG’s Can capital markets help save the planet? report, addressing climate change in investing is now predicated in a new belief about value creation – that it is essential to look beyond the blind spots that come from short-termism and be laser focused on the longer-term risks. With this view, social, human and natural capital will likely influence economic value creation as much as traditional financial capital does.
But so far, capital markets have been slow to price in climate risks, according to the leaders of almost 100 large institutions in the global investment industry participating in the survey on which this report is based.
Its key message is that a green portfolio does not equate with a green planet – yet. Progress in this direction has been slow and is more evident in public equities than other asset classes. In alternative investing, progress is evident in infrastructure, real estate and private equity, where custom-built mandates have been more closely linked with green outcomes. Yet the fact remains that survey respondents believe that there may be a misallocation of capital due to market failure and market inefficiency. The root causes are due to two main barriers:
First, climate change is an inexact science with its multiple scenarios. The data required for its robust modelling are still a work in progress, as widely acceptable standards and definitions are slow in evolving.
Second, public policies in essential areas like carbon pricing, alternative energy and mandatory data reporting by companies have also been slow to evolve in the face of other more immediate priorities. The urgent has come in the way of the important.
In this context, three recent seminal developments could prove pivotal: Covid-19, which has exposed the disharmony between humans and their planet; a global move towards a strong green agenda; and the United Nations COP26 conference in Glasgow in November 2021.
Together, they are expected to enhance policy clarity via a raft of new initiatives that aim to serve to ease barriers that have so far slowed down progress across the value chain of climate investing.
Hence, markets are expected to make further advances towards pricing in climate risks over the next three years. With this clarity, and by working together, investors, governments, organizations and consumers can then take giant leaps to a more sustainable world.
For the first time since the Paris Agreement, the stars are aligned.
