Yathavan Thanapalan, a student on our MSc Climate Change, Management & Finance programme, was given the opportunity to attend the FT (Financial Times) Climate Change Finance Summit by the Business School’s Centre for Climate Finance and Investment and Imperial’s Grantham Institute.
In this blog, Yathavan recounts his learnings from the conference and the MSc Climate Change, Management & Finance programme.
Climate change will be solved by people who want to make money every day – Michael Bloomberg
The day prior to the FT Climate Change Finance Summit will perhaps be one that goes in history – the launch of the UN Intergovernmental Panel on Climate Change (IPCC) report on the 1.5 degree climate risks.
The IPCC is an organisation consisting of thousands of scientists and policymakers from all over the world. Whilst the Paris Agreement in 2015 targeted a limit to a global temperature increase of 2 degrees, the IPCC report warned that even the 0.5 degree difference between 1.5 and 2 degrees can lead to stark consequences. It was in 2014 that the IPCC concluded that climate change was “unequivocally” caused by humans. Such terms are rarely used in the scientific community.
With this backdrop preceding the FT Climate Finance Summit, the urgency in which outcomes not discussions have to be achieved was not unnoticed by the academics, financiers and policymakers in the room.
The Paris Agreement – What is it? And why does it mean so much?
- The Paris Agreement established universal ownership for climate change and each country must have a climate plan for a net zero carbon economy
- The impacts of climate change have the potential to undo much of the improvements the world has made in reducing extreme poverty and development in LEDCs
- The amount of investment needed by 2050 for a zero-carbon world is in excess of $90,000,000,000,000
- Previous international agreements prior to the Paris Agreement failed, such as the Copenhagen Accord, because prominent leaders thought they could fix the problem alone
The Role of Companies and Investors
To achieve carbon-neutrality, this requires a paradigm shift in how companies structure their business. Whilst climate change is the focus of this article, it is important to remember that there are other transitions such as electrification, the sharing economy and urbanisation simultaneously taking place. All of which demands rapid and dramatic changes to business models.
For example, an automobile company can no longer remain a manufacturer of the combustion engine, but has to become a mobility provider. An oil company can no longer remain a provider of gas and petrol, but has to become an energy provider. Companies that do not take part in this transition will see themselves left behind.
Some investors are seeing climate change as an opportunity to create both financial wealth and impact. Private family offices, under millennial management, have chosen to invest their money into companies that have strong social outcomes. Capital has an opportunity cost – why invest in a company that solves problems of the past?
How do we achieve the scale of change we need: Institutional Investors
My key takeaway from the conference is that climate change is a problem that extends beyond the fixed-terms of governments. It is only businesses and investors who will be around for such durations.
Institutional investors, who are organisations that invest on behalf of its members, are large enough to benefit from preferential treatment and lower commissions. Examples include endowment, insurance and pension funds. It is in the interest of institutional investors to protect their members from the possibility of stranded assets, i.e. assets that experience partial or complete write-off.
Stranded assets can be caused by a combination of regulation, economic and physical sources. Climate change and the energy transition can make assets susceptible to becoming stranded from all three pathways. For example, regulation may cause the write-off a nuclear plant; cheaper alternatives in the form of renewables can price out more expensive coal; and natural disasters such as a tsunami (e.g. Fukushima 2011) can destroy assets altogether.
Also to make sustainable investing mainstream, one needs to understand the limitations and regulations that institutional investors face. For example, Zurich Insurance Group has $200 billion in assets globally, which are subject to tight regulation on what it can be invested into. Typical investments have to be investment grade and low risk. The minimum size for an investment is above $50 million and sometimes larger than $500 million. There are limitations around the asset classes that Zurich Insurance Group can invest into, 80% of its investment portfolio is in fixed income, products such as bonds.
My learnings on MSc Climate Change, Management & Finance
To ensure that projects and businesses that can truly solve climate change are financed, we at Imperial College Business School have to understand the different types of investors and their investment preferences. From this, we can design financial products that make it easier than ever to place a sustainable investment.
For me, to recognise and appreciate the roles in which various stakeholders play to solving climate change, MSc Climate Change, Management & Finance has been the platform through which I have pieced together the bigger picture.
At this conference, I was equally comfortable talking about the financial performance of environmental, social and governance (ESG) investing with asset managers, while debating the regional impacts of temperature on the agricultural sector with insurance companies. Few Master’s programmes will ever provide such breadth.
I am excited to see how MSc Climate Change, Management & Finance will further embolden me to become a rounded and complete individual who can make transformational change to society.
Climate change is not solved by only a few acting sustainably. It requires every human, every company and every country on this planet to re-evaluate how it conducts itself.
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