How Climate Change Is Impacting Investing

Charles Paikert

4 October 2023

As blazing heat waves drove temperatures around the world to record highs this summer, interest in climate change has never been more acute. Investors, it turns out, are increasingly factoring the monumental transformation of the earth’s weather patterns into their own decision making.

“Climate change permeates every discussion we have with clients,” said Ted Ashford, chief executive of Ashford Capital Management. Clients at Market Street Trust are also increasingly concerned, according to the multi-family office’s CEO Kara Pass. “People are really starting to feel it,” Pass said. “And it’s not just the younger generation. We’re hearing about from every generation.”

Accordingly, Market Street recently invited clients and business partners to a timely presentation in New York by Professor Bruce Usher of the Columbia Business School, author of “Investing in the Era of Climate Change.”

For investors, the impact of global climate change is comparable to how technology and digitization have transformed business in the past 20 years, Usher asserted. “It will create winners and losers in every sector,” he said. “It’s the opportunity of a lifetime.”

Different strategies
Investors will need to take into account how a changing climate will affect companies positively and negatively in all businesses. For those seeking to invest specifically in areas directly tied to climate change, Usher focused on two strategies: thematic impact investing and "Impact First" investing.

Although ESG investing has become extremely popular - and controversial - and uses environmental, social and governance factors as part of a sophisticated strategy, this approach “doesn’t directly address climate change,” Usher told his Market Street audience.

In his book, Usher noted that ESG can be applied to entire portfolios and benefits from systematic climate trends such as low-carbon technologies, environmental disruption and new government regulations. Nonetheless, ESG “is not focused on solutions,” Usher points out in his book.

Thematic impact investing, on the other hand, which primarily finances private companies to address a specific environment or social challenge, is a much more targeted approach. This strategy, which began “as a radical idea” around 25 years ago, has already attracted approximately $1 trillion - about the same amount that has been invested in fossil fuels during the same time, according to Usher.

SJF Ventures and DBL Partners have been pioneers in the field and align with entrepeneurs focused on a social mission or a “values-driven enterprise.” Climate-related examples include solar power, decarbonization and electric vehicle companies.

Climate-focused businesses with a clear social mission tend to attract better employees and more loyal companies, gaining a competitive advantage, Usher maintained. As a result, thematic investors discovered that “doing well and doing good was not only feasible, but profitable,” Usher said.

"Willing to wait"
Some technologies with the potential to positively affect climate change may not come to fruition until far in the future, however. Those opportunities, Usher explained, require Impact First investing, which accepts below-market returns in exchange for a greater impact.

Breakthrough Energy Ventures, founded in 2016 by Bill Gates and other famous billionaires including Jeff Bezos and Michael Bloomberg, is the largest Impact First fund. With more than $1 billion to invest, it looks for “scientific breakthroughs that have the potential to deliver cheap and reliable clean energy to the world” and is willing to wait several decades for a return on investment.

As Gates put it in a classic understatement, “We are willing to wait a longer time for returns than other funds.” But those returns could be substantial, Usher said, potentially making Gates more money than he has made from Microsoft.

What can ordinary investors do?
Base decisions on underlying trends and not government policies, Usher said. Solar power, for example, will continue to dominate as a renewable source of energy and “will always be cheap,” he said.
Investors shouldn’t rely on climate reports from sources like non-governmental organizations that “lack consistency,” Usher advised. Instead, they should seek out information from news sources like Bloomberg, financial information companies like MSCI, investment banks and global consulting firms.

Short window
Commitment and timing are critical, Usher warned.

Investors need to rise to the challenge “to avoid catastrophic climate change,” he said. Investors financed the extraordinarily successful Industrial Revolution, Usher noted in his book, and “now have an even more important role: financing the world’s future.”

But time is limited. Climate change is ultimately a timing problem, Usher told his audience at the Harvard Club. Global warming needs to be limited to a rise of between 1.5 and 2 degrees centigrade and net zero carbon emissions have to be realized by 2050.

Scientists have made clear what must be done, engineers have invented solutions and entrepeneurs have created commercial applications. But while humanity can avoid a climate catastrophe, Usher cautioned, “It doesn’t mean we will avoid one.”