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How are Impact Investors Tackling the New Opportunities in Climate Investment?

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Published on Oct 26, 2022

Organizations are expected to deal with sustainability as customer issues are also shifting. A Gartner survey stated that 63% of executives at organizations with sustainability programs believe the customers are their most important catalyst for action. 

But how can companies that - as an investor, you invest in - help fight this battle against climate change or build a more equitable world? 

This question lies at the heart of impact investing or investment. Impact investments drive the intention of creating a positive social or environmental effect, along with a financial return. Today around 85% of individual investors and 95% of millennials are interested in investing in sustainable options, as per a recent survey conducted with active investors across the U.S. 

The study also highlighted that only a few investors are engaged in at least one sustainable investing activity, like screening investments for potentially objectionable companies or divesting completely, as the company goals often may not align with the values of the investor. 

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Read more: Private Equity Investment: 2022 Trends in Review 

Climate change Crisis and Impact Investors: Understanding the Relation  

Climate change is the top reason for interest in sustainable investing. Investors want to invest in companies they believe are good environmental stewards or not actively harmful. While climate change presents risks, there are ways investors are taking charge of bringing in a positive change. Many investors are considering environmental risks and how they can affect their portfolios. 

Over the span of the last five years, the US has experienced around $750 billion in total damages from extreme weather events. This clarifies that global temperature rise is leading to a rise in the intensity of extreme weather. However, it is not necessarily all gloom. Investors are aiming to have a positive social and environmental impact by bringing about changes in factors concerning transitioning to a low-carbon economy to mitigate and adapt to the effects of climate change. 

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In the 4th Annual Global Climate Restoration Forum by the Foundation for Climate Restoration (F4CR), two significant issues were addressed. The first issue addressed highlighted that many significant technologies must be employed to remove carbon dioxide from the atmosphere, including the oceans. The second issue stated that the world is now experiencing a methane emergency, for which innovative technologies can help in removing methane from the atmosphere. The term coined for this class of technologies is GGR or greenhouse gas removal.  

Climate-focused impact investors are now taking the issues addressed in the proceedings into consideration and implementing measures that bring in the greatest impact. 

All investors, especially impact investors, are intrigued by the emerging investment opportunities that are focused on addressing climate change. These opportunities feature technologies that hold enormous potential to remove greenhouse gases from the atmosphere. To make the investments impactful and financially rewarding, impact investors are transitioning the course of their investments to achieve the greatest impact by investing in technologies that show promise. 

Read more: Role of Fintech in Accelerating Financial Inclusion: What to Look Forward to? 

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Investment Opportunities to Remove Carbon Dioxide from Oceans 

Carbon dioxide removal or CDR implies removing carbon dioxide from the atmosphere and safely sequestering it. However, due to the bias of behavioral pitfall, organizations believe that the most powerful technologies for CDR are land-based, like reforestation or direct air capture. But this is entirely not the case. 

71% of earth’s surface is the ocean which indicates that the water-to-land ratio is effectively 2:1. Moreover, oceans hold more potential for sequestering carbon. Oceans hold 99% of the planet’s carbon, which is stored in the form of limestones in coral reefs. It has always been and continues to be a major carbon sink. 

Ocean CDR technologies that are under development are being perceived as a nexus to enable impact investors, businesses, and research institutions to connect with each other. They are assisting them in laying out key priorities for extending knowledge on ocean-based CDR. Some of the startups that are working with a nascent ocean-based CDR technology include Seafields. These startups are working to help with the permanent sequestration of carbon dioxide, thereby enhancing the profit potential. 

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Investment Opportunities to Address the Ongoing Methane Emergency 

The methane emergency concerns a series of connected issues. Methane is considered a potent greenhouse gas like carbon dioxide. Natural processes take a lasting twenty to thirty years to break down atmospheric methane into carbon dioxide and water. On the contrary, the timescale for breaking down atmospheric carbon dioxide is much longer. 

Read more: The Rise of Sustainable Finance: 2022 Impact Investment Trends 

The average global temperature is rising by almost 1.1 degrees Celsius due to global warming. In 2021, the IPCC (Intergovernmental Panel on Climate Change) highlighted its concerns about methane, stating that methane emissions are responsible for almost one-third of the 1.1-degree rise. Moreover, methane emission rates were highest during the pandemic. These concerns about methane are compounded because the natural process of breaking down atmospheric methane is getting saturated by the higher atmospheric concentrations.  

However, there have been advancements in developing technologies to remove methane from the atmosphere. These technologies increase the rate at which methane is naturally broken down through oxidation, transforming methane into water and carbon dioxide. Gaining control over methane emissions is vital to avert future temperature increases. If scaled globally, methane removal technologies can potentially prevent a global temperature rise. 

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Where are the Impact Investors Heading with the New Investment Opportunities? 

Impact investors target their investments to generate positive social and financial returns. However, recent research documents are likely to alter how impact investors define impact using sustainable development goals (SDGs). 

One of the principal highlights of F4CR regarding the SDG (Sustainable Development Goals) for climate action stated that the much-publicized goal of achieving net zero emissions by the year 2050 is insufficient. If we want the planet to be hospitable to human life, we need to have negative greenhouse emissions quickly for the atmospheric greenhouse gas concentrations to fall below their current levels. Impact investors are now focusing on the good reason to anticipate the progress and to identify the scope of impact investment dollars allocated to these goals will have. 

The research finding offered important highlights for ocean-based CDR and methane removal GGR. While some profit-centered firms are producing and selling useful products, they are not focusing on methane removal, which is not a revenue generation source. 

Another critical issue for impact investors who are focused on climate change is the international agreement from COP26. Among other items, Article 6 offers a framework for the global market in greenhouse gas credits. If implemented correctly, this offset holds the potential to offer agents make or buy options when it comes to reducing emissions. Firms involved in GGR that do not contribute to removing greenhouse gases as side activities from other profitable operations will have to rely on the market for offsets to generate revenue. 

Read more: The Growing Significance of Technology as a Sustainable Business Asset 

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Seizing New Investment Opportunities 

It is becoming vital for investors to identify opportunities for climate solutions investments. They need to recognize companies that are inventing innovative technologies for renewable energy sources. This also involves-  

Leveraging existing portfolio solutions to: 

  • address environmental themes that stress climate change mitigation and adaptation  

  • seek to advance key environmental goals, including clean energy, industry innovation, and infrastructure 

  • build custom solutions that tailor the specific financial and impact goals 

In today's economic scenario, it is not just about identifying the equity side of a portfolio. Investors are incorporating frameworks to invest in bonds of companies with sound environmental policies or choosing to buy corporate bonds that are labeled as “green bonds.” They are opting for organizations that have a stated purpose of seeking and promoting climate mitigation activities along with other environmental sustainability projects.  

Qualified investors hold the potential to generate positive environmental impact by accessing opportunities in the economic markets, including private equity, real estate, and hedge funds, which could incorporate projects like developing sustainable agriculture solutions or funding green energy projects. With the markets growing, impact investors now have a special role to play.  

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