Should Financiers Do Green Investing to Avert Climate Change?

Can financiers and hedge funds use their investments as leverage to make companies or firms reduce their carbon emissions? An article on The Economist discusses this topic in detail.

The article says that there is a growing “greening trend” in the financial world in the fight to avert climate change. The following are the reasons behind this:

• extreme weather events pose threats to investments,
• governments are taking steps to limit emissions, and
• large asset owners are pressuring companies managing their money to take care of environmental and social issues.

The number of companies in America, Europe, and Japan disclosing their emissions is increasing. The article says that these emissions belong to a scope-one type of emissions.

The Economist differentiates a company’s emissions as scope-one, scope-two, and scope-three. A classification that Greenhouse Gas uses for emissions reporting as well.

• Scope one refers to emissions that companies produce directly;
• Scope two is produced by the companies that provide them with energy;
• Scope three covers all emissions from its suppliers’ extraction of its raw materials through emissions from its end users.

Only a small number of companies- two-thirds of the firms from the S&P 500 and a half from the Euro Stoxx 600 disclose their scope-three emissions. And as expected, scope-three figures are much higher than scope-one emissions.

The article offers possible solutions for firms to reduce emissions; it ranges from choosing renewable energy sources or helping their suppliers change their behaviour to changing what they are selling- which is the hardest to do, according to the article.

Investors, especially those in a climate action group of investors such as the Climate Action 100+, can ask their companies to set their emissions reduction targets, disclose carbon footprint data, or “clean up their act” (How much Can, 2020 June 20). 

The article provides examples from research and studies on what investors are doing to advance the green trend, such as:

• Some investors reward and encourage companies in all sectors to emit less or help others do so.
• A green fund managing hundreds of billions worth of assets excludes fossil-fuel companies from their portfolio, while others seek out “climate-solution firms” using technology to reduce energy demands.

There are many ways that financial services can use their investments to steer firms and companies towards the green economy, not as a driver of climate action but as its enabler, The Economist article says.

The article provides a fascinating insight into the influential role of finance and financial services in influencing firms to take climate action. It offers the latest information on where emissions are coming from, emissions by sectors, and sectors most at risk of climate change.

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