Investors trade over $250 trillion worth of stocks, bonds and other long-term investments in global capital markets every year. A growing number of these investors are interested in the connection between climate change and the assets they buy and sell.
Some investors are concerned about climate change for financial reasons: they believe it poses a risk to certain investments, and want to own assets that are well positioned for a world affected by climate change. Other investors have moral reasons for thinking about climate. By investing in companies whose products or operations help lessen the effects of climate change, they hope to support climate solutions. Conversely, by not investing in businesses that contribute the most to climate change, they hope to push these businesses to think more about their impact on the climate.
Challenges of climate-focused investing
Investment decisions on this scale can affect stock prices and bond yields, and create a real incentive for companies to be seen as good actors on climate change.
But investors who want to shift corporate behavior must make do with imperfect information. ESG ratings and other measures of companies’ climate actions are at least partly subjective, and different rating agencies often disagree about how the same assets should be rated. There is also a lack of transparency in how these ratings are calculated. In the absence of clear standards, investors and regulators worry about “greenwashing,” or funds marketing their investment offerings as being more environmentally friendly than they really are.
