Adopting a Climate and Environment Lens

Adopting a Climate Lens for your investment portfolio may seem daunting – there are so many different pledges out there, it can seem technical, it doesn’t seem related to your core mission, impact measurement is already painful, and so on.

A growing number of banks, asset managers and asset owners have already made climate pledges through initiatives such as the Climate Action 100+ pledge, the Glasgow Financial Alliance for Net Zero including the Net Zero Asset Managers Initiative and the Principles for Responsible Investing (PRI), while firms like BlackRock have announced that climate will be central to ALL its investment decisions. Simultaneously, the European Union sustainable finance framework is set to increasingly govern how money is invested, while closer to home SEBI has announced that the top 1000 listed companies report on business sustainability using the business responsibility and sustainability report (BRSR) format.

These developments increasingly make clear that early adopters will have a first-mover advantage in identifying and leveraging opportunity. At the same time, the impact sector is expected to operate to a higher standard. Being a climate laggard could have dire consequences on portfolio and companies.

The good news is, investing with a climate lens is actually far easier than you might expect; it will enhance the impact you are making and make it more sustainable – both from the perspective of a sustainable planet and long-term business viability.

At its most basic, a climate lens may take one of the following forms

• Exclusion filtering out business models predicated on environmental degradation, extraction or unsustainable resource requirements. Portfolios with this lens are sometimes also called “Do No Harm Portfolios”
• Transitioning supporting businesses in becoming climate conscious and adopting responsible business practices
• Climate Conscious investing in (non-climate) business models that proactively adopt sustainable business practices and consider climate change as part of corporate strategy
• Climate Solutions investing in businesses developed to address climate change through products or services that actively mitigate climate risk or enable adaptation
• Net Zero investing in companies that are or have made pledges to become net-zero carbon emitters within a set time frame (mostly focused on large companies).

These lenses run a spectrum from common sense application to scientific measurement; and being focused only on the reduction of C02 equivalents to inclusive of water, waste, land degradation and other environmental markers. While models that focus on C02 equivalents may appear to overlook other environmental indicators, the Green House Gas protocol (GHG Protocol) is inclusive of GHG caused by water pollution, untreated waste, deforestation and other markers.

Most of the existing pledges focus foremost on the importance of mitigation, in part due to the short timeframes associated with the ability to keep climate change within livable levels, but there is certainly room for impact firms especially, to leverage existing work and networks to enable the communities most impacted by climate change to adapt and secure a greener future.

Two of the beautiful aspects of climate lens investing are that it is readily measurable with clear baselines and outcomes and because it has been driven by science and industry, its models are not black and white, good or bad, but structured to encourage and enable progress.

Decades of scientific evidence and the increasing frequency of extreme weather events and climate related disasters around the planet promise a bleak future if we do not embrace both mitigation of, and adaptation to, climate change across the economy.

From lost crops to human lives, climate change has an intersectional relationship with health, livelihoods, food security, women and children and even geo-political stability. For investors, this creates both opportunity and risk. Below we have outlined where climate intersects with a few impact sectors and what that can mean from an investment perspective.

Health

Health is one of the impact areas most directly impacted by climate degradation. Water and Air quality are both vital to health and have clear causal relationships with a number of chronic and critical diseases. Contaminated water transmits diseases such diarrhea, cholera, dysentery, and typhoid. It is also the leading cause of child mortality. As more of the world becomes water scarce, access to clean water will simultaneously reduce. Similarly, poor air quality causes or exacerbates heart conditions, strokes, diabetes, obesity and respiratory diseases.

WASH (Water, Sanitation and Hygiene) programs were (one of) the first models to address the role environmental degradation has on traditional development portfolios, and that too with notable results. Addressing water contamination through a systemic approach – looking both to reduce water pollution and increasing access to water treatment—has delivered significant health impacts including reducing child mortality, improving nutrition and reductions in readily preventable diseases. Similar, systemic approaches to first understanding and then addressing air quality, would also yield far ranging health impacts for young and old. Opportunities can be as broad as air monitoring, waste treatment, sustainable mobility and green building.

Livelihoods & Education

The BoP are more heavily dependent on ecosystem services and therefore most severely affected by deteriorating environmental conditions and factors limiting resource access. While climate change is not the only threat to natural resources and livelihoods, climate-induced changes to resource flows will affect the viability of livelihoods unless effective measures are taken to protect and diversify them through adaptation and other strategies.

Low-income livelihoods will be the ones most heavily impacted by climate change. Manual labor and agriculture will become more difficult and less profitable as extreme heat and severe weather events become more intense and more frequent, leading both to loss of working days and loss of crops. The transition to a green economy can create new and better earning opportunities, but many of the solutions that will yield the best results, are not the ones that will lead to immediate livelihood improvement.

The challenge will be to help identify the win-win options that address current realities and assist with long-term adaptation. The emerging green economy will create new opportunities across the board in data, monitoring, mobility, renewable energy, green building, regenerative and sustainable agriculture, waste management and so on, but will also require new and adapted skill sets. Livelihood and skilling interventions will need to be both focused on the here-and-now opportunities, and the opportunities of the future.

Food security

India has already witnessed adverse impacts of climate change on food production, transportation, storage, and distribution. Rising temperatures, erratic rainfall, extreme weather conditions (such as prolonged droughts and floods), changing soil fertility, and new pest infestations are major factors contributing to stagnant agricultural growth. Across India, farmers increasingly recognize that chemical fertilizers are reducing yields and soil quality, and yet to achieve a yield that makes economic sense, the only near-term solution is using even more chemicals, further depleting the soil and increasing chemical runoff in local water. Farmers are trapped in a vicious cycle of use and impact, and farmer distress is mounting -- we have already witnessed mass male migration from farmlands to cities.

At the same time scientists have found that a rise in temperature reduces the nutritional value of harvests, particularly rice and wheat, which form the staple food for most Indians. Higher carbon dioxide decreases zinc, iron, proteins in wheat and rice. As India becomes the most populous nation in the world, it is becoming apparent that we run the risk of both food insecurity and massive malnutrition.

Adaptation strategies based on the principles of climate-smart agriculture can counter the impacts of climate change, such as regenerative agriculture, the sustainable use of natural resources like water, and the promotion of climate-smart or resilient crops. Shifts to organic or more climate appropriate crops can take multiple years to transition and are generally not supported by the market – there is both difficulty sourcing inputs and selling novel crops in the small scale that most farms yield. Models that provide near-term financial support to transition to more sustainable cropping, paired with forward and backward integrated market linkages could result in more resilient and climate friendly crops that are in time also more profitable. Other opportunities emerge around sustainable and clean-energy-based processing, irrigation, storage and transport. Food production, processing, use and waste management will all require systemic change, and opportunities are already apparent in each of these.

Women & Children

Women are significantly more vulnerable in climate change scenarios in all aspects -- livelihood reduction, decreased food security and nutrition, water access and increased burden of caregiving in health situations. At the same time, they are key agents of adaptation and mitigation to climate change. Their responsibilities in households, communities and as stewards of natural resources position them well to develop strategies for adapting to changing environmental realities. Women’s leadership in agriculture is increasingly being recognised as key, with women playing a strong role in adopting new processes, adapting new technologies, urging action and sharing information. Gender differentiated strategies for responses and capacity building will be critical for success.

Similarly, children will be the greatest victims or beneficiaries of what happens with climate change. Whether considering education, food security or even geopolitical stability, if we do not solve climate, children will be at the frontline of impact.

Conclusion

The sooner we act, the lower the physical and transition risks of climate change and the higher the synergies between climate action and other societal benefits. As funders, we will need to be proactive in addressing gaps and capturing opportunities

Integrating a climate lens within an impact mandate will require both forward thinking, and a deep understanding of trade-offs and co-benefits. But by doing so we are reducing negative implications, creating a better buffer for climate shocks, and enabling a transition to the climate-resilient economy of the future.