A reduction in the ‘greenium’ – the premium companies receive for issuing green bonds compared to conventional bonds – would help prove this point, by taking away the reward system that is currently in place.
The inconvenient reality is that economies and corporate finance are still primarily driven by returns and profitability. Removing the box-ticking pressure created by external forces means that companies and fund managers can assess their strategies on an objective basis according to the key questions:
- Is there an economical incentive for me to adapt to climate change prospects?
- Are there strong enough rates of return to invest in new climate change technologies (taking into account strong government support and subsidies)?
- Do I see a long-term benefit in this investment, such as increased market share in five, seven or 10 years’ time?
In other words, profitability will be a driver of ESG activities, and companies and fund managers will be financially rewarded for their impact, rather than viewing it as a compliance burden.
In for the long term
If companies and investment managers are pressured to say they are green rather than be green, that is when we have a problem. Climate change is a long-term game, which requires immediate action but may not produce visible results for another five to seven years.
Market participants need to be comfortable in this understanding. All attempts to force change from the outside, such as by activist shareholders, are doomed to fail and bring even more greenwashing as companies try to comply with these demands rather than generating real long-term value.
As with any topic in the financial world, climate change needs to be understood through the lens of profitability and risk.
If companies and investment managers are pressured to say they are green rather than be green, that is when we have a problem.
Investors would do well to shift their focus to the incredible investment opportunity and monetary value that climate change solutions present. It is a huge driving force behind the next wave of innovation, transforming industries that have long been considered unexciting, such as utilities or industrials.
There are major incentives created by the governments that further enhance project returns. Routing financing to the right companies can be transformational for these sectors and drive excess returns.
However, too often, this is not the driving force behind sustainable investments, with investors distracted by the desire to appease the masses, slapping green labels on whatever might fit.
Climate change also presents an opportunity for active managers to take back market share from passive funds, which over the past decade have seen substantial inflows.
