Every Impact Portfolio Should have a Climate Lens

From an inconvenient truth we used to be able to ignore, to THE topic we can’t escape, climate change is everywhere. Yet for many people, the realities of climate change are just a degree too far removed to seem actionable. For some, the climate in their locality has improved. For others, lifestyle changes can be unpleasant while seemingly too small to result in meaningful change. We look at government and industry as the culprits, and therefore also those most responsible for solving the problem.

In impact investing, we finance models meant to counter what challenges society and to demonstrate models of capitalism that reward ethical and impactful businesses. Yet few impact portfolios evaluate investments for climate impact, and fewer still invest in climate outcomes.

As impact investors our mandate has to be bigger.

Every impact investor should have a climate lens.

When considered only as CO2 emissions or starving polar bears, climate seems distant and secondary to the promise of education, health interventions and livelihoods, BUT climate is SO much more. Climate is where and how we live. It most certainly includes air quality, but also water and land. It is how we use resources and what we do with “stuff”, when we are done with it.

Climate and environment touch every part of the global economy, every moment of human existence and therefore shapes the impact that each of us seeks to achieve, whether we realize it or not.

In failing to address climate change in our portfolio, we are committing climate (covid) deniers' greatest error - ignoring science doesn't just cost livelihoods, it costs lives.

Poor air quality has already been linked to reduced learning outcomes, lost income, reduced GDP and myriad diseases including heart, respiratory, stroke, diabetes, and obesity, as well as impacting mental health. Water quality and availability is linked to food security, child mortality, reduced GDP and attendance and access to schooling for girls. Extreme climate events are expected to displace more than 1.2 billion people by 2050. Every science-based projection shows that climate-related risks for natural and human systems will only increase.

The science behind the Paris Agreement aims for climate and environment goals that are meant to hold the average global temperature increase to 2 degrees Celsius by 2050, while at the same time pursuing efforts that limit the increase to 1.5 degrees.

With deadlines 30 years away, it is easy for business, government and our own investing priorities to overlook climate in favor of more “immediate needs”. But the timelines are clear. The latest models project that the planet will hit 1.5 degrees in warming in the next five years. At current rates, a 2-degree increase would be a tremendous achievement.

Good and bad, certain projections may not come to fruition exactly as estimated, but as finance professionals, we know projections are guidance not a crystal ball. Across the globe, climate change has already resulted in more extreme weather – fire, floods, hail, drought – as well as very tangible, daily human impacts.

The common understanding is that climate change (like covid) is the great leveller. No matter who you are, where you live and how much you earn, you are impacted the same. This is a false equivalence. When economic models are applied to climate science, convexity not only shows that the costs of mitigating climate change become more expensive the longer we wait, but human impacts are higher, and it also becomes increasingly expensive to respond to the human and social impacts.

If we are to believe science and economics, over the next 30 years, the need for impact interventions in response to climate disaster and the cost of providing this support will increase by orders of magnitude. Inequality will increase both in quantity and gravity.

And we see this already. Those who have the least ability to protect themselves, adapt, or recover from disaster, are already the most affected. Climate change has a direct and causal relationship on many social problems.

We need to solve climate problems, not for the benefits it will create, but for the catastrophes it will avoid and the suffering that real adaptation measures can avert.

We also need to solve the climate problem so that our own work and our portfolio companies remain viable.

There is good news. Adoption of a climate lens does not have to limit the work you are doing. It should enhance it. Investing in sustainable models now will increase impact over time, reduce future climate and social problems and future-proof your business and those in your portfolio.

There are several ways to adopt a climate lens. Here are a few models:

• Positive Selection – investing in companies that provide a social good in an environmentally sustainable manner, that incorporate climate realities into their product/solution/service, that protect communities from the known and predicted negative implications of climate change, that enable communities to become more resilient, and most importantly, that enable communities to leverage the potential opportunities created by a green economy
• Transitional – helping companies become more sustainable Or minimally
• Negative Exclusion – not investing in companies with business models predicated on environmental degradation, extraction or unsustainable resource requirements

Adopting a climate lens has long term strategic benefit for the planet, your portfolio, and most importantly, the populations you work with. It also ensures that you are a part of the solution, not part of the problem.

Not one of us has a portfolio that will not be impacted by climate change.

Business and industry are already making climate pledges and taking action in their supply chain. Financial service companies around the globe have already begun efforts to invest sustainably.

To keep the planet below 2 degrees warming, we all have to do our part.

As the beacons of demonstrating ethical capitalism and to achieve the impact set out in your respective mandates, it is imperative to adopt a climate lens. Impact investors who do not are at risk of rendering themselves redundant.