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Back in my university days, studying the Kyoto Protocol was an exciting bridge between my business skills and policy interests. I had always cared for the environment, but what this environmental treaty revealed was a new market mechanism approach to environmental solutions. Simply, it had identified that we had the technical solutions available to reduce global warming, and began creating the incentives and conditions to get the investment in.
For someone like me, who was enjoying business and law but really cared about the environment, it opened up a path to applying my finance and law degrees to the climate change cause, and help make those investments happen.
I worked on environmental sustainability, in both private and public sectors, for more than a decade before I started my own family. Back then my motivation for reversing the effects of climate change was already very strong. I didn’t think I needed much more motivation. But what I have found since having children is that the motivation now runs even deeper. When I think about my own daughters, aged 3 and 7, I feel the fear much more strongly. If we get this wrong my daughters, and all children, will be inheriting a much more unpleasant planet to live on.
The evidence is clear—the risks of climate change are stark, but the solutions are there. These solutions are also so beneficial for the planet—better for cleaner air and healthier land as well as avoiding dangerous levels of warming. There are solutions in clean energy, sustainable investments, green buildings, industry, agriculture and transport. The list continues from there, with more economic opportunities and exciting technologies that make for a very compelling case, the same case that motivated me decades ago.
This next phase I’m hoping to see is a wave of capital and a movement of people with financial resources and skills that will really speed those solutions.
Accelerating change
The first thing to realise is that there’s a lot of inertia in our systems of finance. Everything from websites to product designs have been created by people and processes shaped for decades before climate change solutions became much more readily available. But what the smart folks have seen is that as finance starts to move, the benefits build upon themselves. The opportunities create their own momentum.
The second benefit is that the more capital flows towards sustainable options, the more it is normalised. In turn that supports movement at an institutional level as those actors see sustainable finance as mainstream rather than a variation of the mainstream. Many institutions have shifted towards this thinking in the boardroom. They’ve recognised the shift is on and there’s global capital pressure. They also see the growing consumer and stakeholder pressure.
The third benefit is that by increasing the capital that is being deployed, we’re helping the underlying economics of the solution: Most clean energy technologies have economics that improve with scale of deployment—so the progress feeds more progress.
Aside from the capital flows, there’s an interplay between the action of moving capital and popular sentiment. It’s a lot easier to demand sustainable finance if you can see it. Asking the question helps trigger the demand, which helps trigger the internal activity of corporates and financiers to work harder to provide the solutions. Similarly, consumer demand can translate to voter sentiment, which then can translate to government confidence and policy, and that can accelerate the change faster. It can be a virtuous loop.
Playing our important part
So, given that we are in a race against time, and that there are clear benefits from speeding up, innovative investment-minded people are a crucial part of the picture. The engineering is done for many climate solutions but to translate these into a commercial case that is attractive to investors in today’s financial markets, it takes a dedicated team with a really sharp sense of what’s required, clever analytics and good old-fashioned hard work.
Individual investors and family investors play an important role as well. Not only providing the capital but in spreading the safer climate message. Firstly, individuals start to move up the awareness curve through receiving the dividends and having an appreciation of the risk profile, the returns, the stakeholders and co-investors, and the quality of financial management. Secondly, individual actions can help broaden the awareness among individual social networks—your friends, family and professional colleagues.
We know that the most trusted messages are those in our own circles. Facebook works because we enjoy and trust messages from friends and family. So investors in new clean energy products have very powerful roles because they now have lived experience of it, which demystifies impact investing for their networks of friends and family.
People come around to sustainable investing in their own time. The main thing is that once you’re here, you get helped up the learning curve as fast as you can go and then you can share your knowledge with others and scale up your commitments.
People can be a little hesitant to ask a stranger about it and fear they lack the knowledge. So the more investors who are happy to talk to their friends and family the more safe places exist for new providers of capital to join in. I’ve often heard my sectors described as a ‘new asset class’ yet often there is little financial difference from other products. These products really should be far more mainstream by now, and could be if more people understood this.
And then, when you zoom right out, beyond the individual, to a national scale, there are some terrific examples in Europe and America and Asia.
In Europe, new investment providers will soon be asking new customers what their risk preferences are in terms of sustainability. The European Union’s action plan on sustainable finance intends to ensure investment firms and insurance distributors integrate sustainability preferences into suitability tests when giving advice to investors. Those firms would need to then offer products that meet their clients' sustainability preferences.
But just because an action like this hasn’t been rolled out on a national scale in Australia, doesn’t mean we can’t start doing this now on a grassroots level. This is something all people can do within their own families. It’s important to approach impact investment with two lenses. Saying yes to avoiding harms but also yes to creating solutions to help reduce the existing harms. We should look across the areas of energy, water and nature and ask ourselves: “What are our risk preferences in regards to sustainability? What risks are we comfortable with in terms of negative impact or environmental harm?”
If the risk preferences that the family discussed are that the family is not comfortable with increasing the risk of polluting energy systems, polluted water systems, or damage to nature through investments, then what are the investment options? Impact Investment Group and others can help provide answers to those questions.
Achieving results in a challenging environment
Climate change is both a long-term challenge and a short-term urgent challenge. To achieve the long-term goal of stabilising our climate before we reach a temperature increase above 2C, which is what scientists consider a dangerous tipping point, we need to imbalance the scales in terms of emissions.
Temperatures will keep rising until we no longer add more greenhouse gases into the atmosphere than we can absorb in any year through natural sequestration in oceans and trees, or physically absorbed through carbon capture technologies.
Reaching that point is a case of helping a thousand flowers bloom. It will take thousands of infrastructure investments to turn over all of the assets that currently use fossil fuel energies and emit greenhouse gases and replace them with non-polluting energy. Reaching those short and long-term goals can and does happen.
For example, in the short term, the financial returns on a solar farm can be available within a year or two of it being constructed. Once it is connected to the grid, it can be earning income from selling the electricity that’s displacing the fossil fuel energy in the grid. In the long term, that solar farm is an infrastructure asset that can operate for decades to come.
When we look at investing in green building—not only will that building exist for decades, more importantly from the day it is built it is performing in the most emission efficient way and not locking in emissions for decades. Behind the beautiful facade there’s clever technologies and smart optimisation that means its environmental performance is much better than the average building. Constructing a new building in an emission neutral or energy efficient way brings immediate financial returns the day the building is tenanted. Smarter buildings are more energy and water efficient, which means we use less energy and water, and therefore pay less.
The introduction of nature into the built environment has wellbeing benefits. Mental health of employees is better when nature is in their environment—whether that’s indoor plants, natural materials, such as timber, or better views of outdoor nature. It’s quite well documented that improved mental health and well being benefits translates into financial benefits in improved tenancy occupancy rates.
If we start looking at green buildings at a precinct scale the benefits are broader. There’s solutions for mobility and transport infrastructure that allows an urban precinct to function better, for example creating better access to the building precinct with more walking options and options for electric vehicles and infrastructure. By nurturing premium tenancies those financial returns continue over the life of that asset.
And yes, returns can vary. In some cases, you often have to make a number of investments over a number of years before a new venture can start securing that financial return. And some of those returns can be on the outside, they could be introducing a whole new business model to a sector or disrupt or help disrupt some of the inertia that’s part of the system. The urgency is in making sure we do thousands of these investments every year and don’t lose time.
Aiming for a new global economy
Although it’s true that Australia has lost a lot of the last decade through debate, uncertainty and inertia, what keeps me optimistic is that when I look at what the solutions are for the transitions to a safer climate and a more sustainable planet and economy, and I think about our country, Australia has a brilliant endowment of natural, physical, human, financial, geographic assets and resources.
All these things are what is needed in a global economy that is decarbonised and sustainable. Australia can be a low carbon energy super power. Australia can be a winner in a low emissions world. The world has changed fast before, sectors have changed fast before.
This time it needs a pace of change on a massive scale. To get the initial direction of change accelerated it’ll take a big nudge and that nudge needs to come from all sectors—consumers, investors, government and supply. Climate change is going to need all of us and all the ingredients are there, it’s now time to pay attention and to dial it up. What excites me the most is that the solutions that are good for emissions turn out to be good for society on a whole other realm as well.
That’s what gives me hope for my daughters. If we stabilise emissions for a safe climate, we’ve actually also achieved an economy which our children can grow up in that won’t be increasing the environmental harms as we are now.
They will live in a world with cleaner air, hopefully more harmonised communities, and more diverse sources of income geographically and economically. All those things combined will make for a safer world not just climatically, but geopolitically as well. See you there.
