Investment goals rarely consider the external costs to the environment when calculating potential profits. With the effects of climate change becoming more evident and severe it is vital to consider environmental risk when investing and do so in a way that leads to a sustainable future.
Catastrophic climate change is becoming a visible reality and there is growing consensus that the global economy as it stands is environmentally unsustainable. Humankind depends on range of resources from the planet which we take for granted: fertile agricultural land, drinkable water, minerals for our industries and the ecosystem that makes all this possible. It is clear that these resources and the environment have become over-exploited and are not priced properly or, indeed, valued at all in traditional economic terms.
At the same time, the traditional economy is not delivering quality of life for a huge section of the world’s population and there is a massive gulf between the wealthiest and poorest. Potential population growth will place even greater demands on natural resources. The current economic and financial system is failing us because today’s capital markets are not currently allocating money to areas that promote a sustainable economy and are not penalizing carbon emissions.
This means we need to make significant changes to how investments are made. Investors we have the power to shape the development of capital markets so that they create resilient, stable and sustainable economies. In fact, focusing on sustainability as a guide for investment makes business sense. Science clearly tells us that continuing to burn the fossil fuels will worsen climate change and will profoundly disrupt economic activity due to the damage to our weather patterns and ecosystem. The floods, heat waves and other extreme weather events that have occurred in recent years serve as a warning of things to come and their mounting costs could soon be financially disastrous.
Although some argue that achieving the goal of creating a sustainable economy by 2040 is unrealistic, through many small and large investment decisions significant change can occur. It is a huge challenge but it is possible, in principle, to achieve this. The way that financial markets operate over the coming decades will be vital to achieving that goal. By placing a price on carbon emissions and directing investments only to sustainable enterprises, investors can play an important role in achieving a resilient, sustainable economy that maximizes quality of life for everyone and achieves a truly sustainable future for our children.
