Financing the future through responsible investment

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Nick Spooner and Sarah Clements, Grantham Institute and Imperial College Business School Master’s students studying Climate Change, Management and Finance, dive into the question of responsible financial investments, and ask whether it’s time to make some changes?

There is something alluring about the adrenaline-fuelled behaviour of the investors in Hollywood films like The Big Short and The Wolf of Wall Street. The glamorisation of the drugs, strippers, and money is hard to ignore. In reality, these antics are a thing of the past, which in our eyes is a good thing, although many people in the financial centres of the world may disagree.

A key theme these films portray is the disconnect between the way the characters manage money and the social effects of their actions. In The Big Short, it is a sobering moment when Ben Rickert (played by Brad Pitt) reminds his juniors, Jamie and Charlie, of the social ramifications of their bet against the economy.

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The testosterone-fuelled lifestyle of unregulated, socially irresponsible financial institutions. Source: Home Theatre Forum

Looking at the financial world through the lens of social impacts is critical if we are to properly recognise macroeconomic trends. At the 2015 United Nations Climate Change Conference (COP21) in Paris, 195 countries committed to limiting global temperature increase to 2 degrees Celsius above pre-industrial levels, with an ambition to limit it to just 1.5 degrees. This commitment is now crucial in shaping the development of nations worldwide, and is undoubtedly the most important macroeconomic trend in the financial world. Investors will have an important role to play in promoting technologies that minimise the production of greenhouse gases (also known as low-carbon technologies, or ‘cleantech’), and maximising the opportunities for those who act early – but how?

Acting responsibly

A new practice has emerged, known as ‘responsible investment’, where investors take into consideration – and try to make improvements to – the environmental, social and governance (ESG) performance of their portfolio. These factors have been shown to have a strong positive relationship with corporate financial success and are being used to redefine investment strategies across the world. They can be used to outline opportunities for large investments in the cleantech sector, as well as determining the assets that are most at risk from climate change.

Responsible investment is growing rapidly and to date around 300 separate initiatives currently exist. This progression is highlighted in the formation of the Task Force on Climate-related Financial Disclosures (TFCD) by the Financial Stability Board, which aims to help companies open up to investors about the level of risk climate change poses to their activities. Chaired by philanthropist and former New York City mayor Michael Bloomberg, this initiative is expected to drive significant changes in the private sector, improving transparency and providing meaningful metrics that expose the potential financial benefit of these investment strategies. Such data can help to persuade investors to support a transition to a low-carbon economy.

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Mark Carney and Michael Bloomberg launch the Task Force, Paris 2015. Source: FSB TCFD

As with everything in the financial world, this is not an exact science. The weight with which individual investors assign to each factor will be at their own discretion and wider economic trends will still be given critical consideration. For beginners, standardised benchmarks such as GRESB and CDP can be used to measure ESG performance. These are somewhat limited to “large cap companies” (those with outstanding shares worth over $5 billion), so investors looking to capitalise on growth in the low-carbon sector will have to keep a close eye on trends in new technologies (such as energy storage systems).

So how is this relevant to us?

As students of climate change, management and finance, we recognise how important it is to invest responsibly, and as potential future business leaders we have the opportunity to bring about this change.

Imperial is a world leading and highly collaborative academic institution, home to the Grantham Institute and the Imperial Centre for Climate Finance & Investment. Right now, we have the opportunity to use this wealth of knowledge and define an investment strategy that reflects the College’s progressive and incisive culture. Elsewhere, such positive steps have gained international regard (see Brown University and University of Cambridge). Here we see an opportunity to boost Imperial’s reputation, by being both innovative and courageous. In 2017, when students and academics increasingly seek out institutions that align with their own values and beliefs, an awareness of, and responsible reaction to, the risks climate change poses may be a major factor for many future Imperial acolytes.

This is only the beginning…

Whilst there is evidence to show the positive financial results of integrating environmental, social and good governance into investors’ decisions, this is only the start of a much longer journey.

How far can external drivers boost growth, and ensure a competitive advantage to cleantech companies? Could taxes on carbon emissions have a negative effect on highly polluting sectors? What about the march of technological progress and the falling cost of low-carbon technologies versus their fossil fuel-driven competitors?

The answers to these questions are key to driving the transition to a successful low-carbon economy, and determining how to ensure financial institutions are not left behind if they do not start to consider the ESG factors in their investment portfolio.

That’s why we have set up the Responsible Investment Club, and are keen to hear from people at Imperial who want to join us in discussing this rapidly changing sector, and taking action that supports growth, progress and action against climate change.
If you are interested in finding out more, then email us at responsible.investment@imperial.ac.uk to hear about upcoming meetings, and our upcoming Panel debate on ‘Responsible Investment in the Low Carbon Economy’ at Imperial in May 2017.

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