Economic, Social and Corporate Governance – or ESG – is not a new phenomenon. But the collective awareness of social and environmental factors is growing by the day. Ways to limit energy footprints are shaping the way people live and business operate. The COVID-19 pandemic has involuntarily helped such voluntary carbon offset efforts, even if only for the short-term. During complete or partial lockdowns, we saw a stark reduction in pollution levels. We also learnt that using video communications was a valuable alternative to in-person meetings and travel (and often, more efficient).
THE PERFECT STORM
This came at a time that enabled us to experience the true impact of climate change: unprecedented tornadoes and extreme weather in the U.S., widespread floods throughout Europe, and heatwaves across the globe. The call to action from both citizens and governments is clear:
“We have a single mission: to protect and hand on the planet to the next generation.” – François Hollande
And it’s getting louder.
POWER IN NUMBERS
Though solutions are not immediately obvious, incremental changes to the way we live can collectively have a significant impact on our planet. Aside from the actions we can take on an individual level, the only way forward is to acknowledge that money and financial assets need to be used as incentives to drive energy transition to reach a neutral or negative carbon footprint.
POWER IN UNITY
The three domains of ESG are increasingly linked to the concept of responsible investment. Accountability amongst private and institutional investors is becoming more widespread. This means three things:
- Investors are progressively shifting towards a position where they say that the best bang for buck may not be money itself but the positive impact on the environment. Naturally, they will invest in projects that provide some level of financial return, but more and more money is being invested in ventures that aim to reduce or avoid carbon emissions, in a bid to expedite the transition to greener, renewable sources of energy.
- Corporates are increasingly undertaking ESG marketing efforts. Most corporate websites have a section on how the environment is one of their top concerns and the local communities their ESG ventures support. It is true, sometimes. The big industrial companies that need more carbon credits, than the ones they get as allowances, turn to the voluntary carbon offset market rather than buying from the exchanges appointed by their regulators. Because those projects are identified, it makes it easier to describe and relate to. Even if the ultimate goal is to buy carbon credits, it sounds nicer to say that you are investing in reforestation projects in Malaysia or Brazil, or carbon sequestration in Germany or France. But at the end of the day, it is helping everyone. Companies that source carbon offset credits, offer a return to the companies that funded those projects and provides an incentive to offer more.
- Climate financial risk is now measurable which makes financial organizations and investment managers more accountable and the nature of their investment more visible. If you’d like to learn more, speak to our friends at GreenRWA.
Whether you buy voluntary carbon offsets or trade carbon credits on spot, futures or option markets on one of the five regulated exchanges, you need to manage your risks like you would for any other asset class.
Let us know if we can help.