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The financial sector’s role in tackling climate change

06 December 2021

Say what you will about COP26. Many people can disagree on whether it was a breakthrough or a disappointment. There is no doubt however, that the recent international summit in Glasgow captured today’s zeitgeist regarding climate change and finance. The scale and urgency of the threat have spurred many investors into action.

Market movers have become much more ambitious about taking advantage of the undeniable growth and necessity for renewable energy, more sustainable agriculture, improved infrastructure, and other sectors that must succeed in order to limit dangerous global warming. When the chief executive of BlackRock, Larry Fink, writes an op-ed in the New York Times calling for net-zero carbon emissions by 2050, everyone should take notice.

Accordingly, private equity managers, credit managers and others want to put capital to work to address the harmful effects of greenhouse gases and other pollution. They also understand that, as the economy shifts, so should their portfolios. That means they increasingly expect their professional service providers to have answers to their questions regarding strategies for wise reallocations.

The regulators are not far behind. Europe has enacted new rules for environmental, social and governance investing. Britain and Hong Kong are on track to adopt ESG measures. American officials are formulating their approach now.

Follow the carbon footprints

The natural consequence of these changes is that competition over investors and partners will hinge on firms’ ESG plans and expertise concerning new ESG opportunities like the carbon markets deal reached by almost 200 countries at COP26. That especially holds true for younger investors who have grown up learning about the dangers of rising sea levels, droughts and other natural disasters.

Yet today the vast majority of companies, including investment firms, lack an adequate analysis of their carbon footprint. Rather than working off assumptions and estimations, professional service providers like Apex Group can help private equity managers and others audit their companies’ carbon footprints so they can obtain data and intelligence to help them plan for the future and stay competitive. Apex Group deploys a software platform that calculates emissions across a wide range of sources using more than one million emission factors anchored to leading accounting standards and protocols.

Private market managers and their companies will have to compile carbon footprint information for investor and regulator disclosures. But the utility of that data goes far beyond compliance. If one’s goal is to hold a company for five to ten years, for example, you need to question whether their carbon footprint will affect their value. Only by knowing their dependence on fossil fuels, exposure to potential carbon prices, and stakeholder pressure for greener products and services, will an investor be able to fully determine their value over that period of time.

More sweeping changes are possible 

Faced with dangerous levels of emissions, both the effects of climate change and humanity’s response to it could reach a tipping point very soon. These twin factors could cause major economic turbulence and badly catch out those unprepared. Consider how quickly the coronavirus pandemic upended the global economy, with governments prepared to put almost all activity on hold, and then spend vastly to get it going again. If the climate crisis continues to escalate beyond key thresholds, do not be surprised by governments taking drastic action much like they did with their pandemic response.

Firms can understand and mitigate their risk exposure of such events and combat climate change by measuring, reporting and reducing their emissions. Those that wait too long will face a tougher competitive environment in the next five to ten years as the wider market wakes up and businesses start to differentiate themselves based on their environmental credentials, not to mention the new generation of investors driving the ESG agenda from the top down.

Pressure to address climate change on Wall Street, the City of London and other financial hubs has been building for the past 20 years. Now the penny has dropped. COP26 reaffirmed that things are going to be dramatically different in the near future because of climate change. Private markets are no longer in a holding pattern. They’re not going to let the world pass them by. With tools such as Apex Group’s carbon footprint service, no investor should be left behind.

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