Climate impact investing: it’s not yet the phrase on everyone’s lips, but it might be soon. In the race to stop climate change, a new approach to investment might just provide the answer we’re all looking for.
The Speed Read
1. Every time you spend money, it has an impact on the world — positive or negative.
2. Climate impact investing helps to fund companies that are trying to stop climate change through reducing their CO2 emissions.
3. It’s a relatively new investing approach that has the power to change the world.
Impact investing explained
First things first: what is impact investing?
To explain that, let’s start with our everyday spending.
The way we spend our money is changing — increasingly we're buying our clothes, our coffee and even our cars in alignment with our values.
But the real power?
It’s sitting right there in our bank accounts.
In fact, one third of the world’s capital belongs to individuals — and if money equals power, that’s an awful lot of potential power.
It might not be obvious all the time, but every pound, euro or dollar we spend has an impact. Some of that impact will be good, and some less so.
Take the impact of buying a coffee in a disposable cup from a multinational chain that underpays its suppliers and uses cheap labour. That’s going to have a negative impact on the world.
Using a KeepCup to get a takeaway coffee from a local coffee shop which uses Fairtrade beans? A much more positive impact, because your money is going to support a local business and pay a fair price to the coffee farmer, and by reusing a coffee cup you’re avoiding an environmentally-harmful paper one.
In other words: the way we choose to spend our money is important.
Impact investing is a way of harnessing that power on a larger scale.
It’s a term used to describe a type of investing that considers the amount of good that a company does, alongside the profit it makes. But it’s not some wishy washy promise to do no harm. Impact investing requires rigorous analysis to prove the exact impact that invested money has.
Types of impact
As you can see when you buy something as simple as a cup of coffee, impact can be measured in many ways.
First, there is the economic impact of using a neighbourhood versus a multinational business, and of using cheap or fairly paid labour on the other side of the world. There’s the environmental impact of your cup choice, which includes what it’s made from, how it’s made and how it’s transported.
But that’s just the beginning.
Impact can also be measured in support for minority populations; the use of pesticides on agriculture; economic growth in the developing world. The United Nations Sustainable Development Goals lists no fewer than 17 separate goals — from quality education to clean sanitation to plastic-free oceans — if equality is going to be achieved for all.
Climate impact investing: How does it work?
While “impact” can be related to many things — community support, workplace rights, wildlife conservation — when we at Cooler Future talk about impact investing, we’re talking about climate impact investing.
Climate change is one of the most urgent issues facing humanity today. The planet is warming due to an increase in carbon dioxide (CO2) in the atmosphere, mostly due very human actions like burning fossil fuels and destroying rainforests.
The climate is already 1.16 degrees celsius hotter than the 1900s, and experts predict that if it rises by another 1.5 degrees, we’ll be at a point of no return. Extreme weather, rising sea levels and dirty air, among other things, will be here to stay.
Climate impact investing:
Investing in companies that actively seek to reduce or remove their CO2 emissions from the atmosphere.
Climate impact investing doesn’t mean investing in not-for-profits or even those organisations that are specifically delivering an environmentally conscious product (such as a wind farm or recyclable coffee cup, for example). It can be any company in any industry, as long as they are proactively tackling their carbon emissions, seeking to reduce them or working on removing carbon from the atmosphere.
In fact, in some industries, the greatest climate impact a company can have might be in providing an example on how to reduce emissions.
Take the airline industry, which is particularly harmful to the environment due to the amount of fossil fuel needed to power a plane. Imagine an airline that invented a plane that could run on solar electricity rather than fossil fuel — that company’s CO2 footprint would be tiny. But even more excitingly, if every other airline copied them, they could reduce the entire industry’s footprint, spelling the end for environmentally disastrous fossil fuel-powered flights forever.
So climate impact investing isn’t about solely investing in the “green” companies. It takes a more nuanced approach, looking at which companies are making emissions reduction central to their business strategy. Solar powered airplanes aren’t likely to appear any time soon, but if they did, the company responsible would be worth investing in to ensure their success.
Climate impact investing and you
Now let’s look at what happens when one person makes a climate impact investment:
Meet Alex. She wants to invest in Nick’s company, which makes and sells really cool bikes. It’s good timing, because CoolerBikes is looking for investment to help grow the business.
In the process of sourcing materials, manufacturing and selling the bikes (plus things like keeping the shop lights on, an occasional bus to work when it’s snowing and disposing of the delivery packaging), CoolerBikes is responsible for 2 units of emissions every year.
Alex buys 1 of the 5 shares available for €1, so her €1 investment is responsible for 0.4 units of emissions. When it comes to decision making about whether to spend money on new clean energy manufacturing processes, Alex’s share means that her voice will be heard by Nick when making business decisions.
Nick uses Alex’s investment money to improve his manufacturing processes, switching to a factory that is solely powered by clean energy. This means he halves his emissions for the following year, so Alex’s €1 investment is then responsible for 0.2 units of emissions.
The factory also has the ability to manufacture a brand new type of bike with pedal-powered lights, so the following year he’s selling more bikes than ever before. That means the value of Alex’s share has gone up by 25%, so if she wants to, she can sell it for €1,25.
CoolerBikes is a profitable business, and there is little risk that the company will go out of business. And crucially, it’s also a good investment when the impact on the climate is considered.
It’s not difficult to see how this example can be scaled up to produce world-changing results. If the €1 investment is actually €1,000, and one person becomes 1000 people, all of a sudden we can harness the power of €1,000,000. The companies invested in will be bigger, which means their impact will be bigger too.
And the great news is that it’s already happening. In fact in 2018, $502 billion worth of impact investments were made, which is almost the size of the Swedish economy. The previous year, it was half that (Romania’s GDP, if you’re a fan of country equivalents…). With this kind of growth, the world-changing potential of impact investing is undeniable.
But there's another, more personal benefit. Impact investing answers the question “What difference can I make?” once and for all. Despite what it might sometimes feel like, you’re the opposite of powerless in the fight against climate change. Invest in companies that are reducing their emissions, and you can transform the future of our planet.
So with that, there's just one question remaining.
Are you ready to change the world?