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‘It’s a tsunami’: Why finance is ‘going green’ and what you should know about it

Investors are looking at 'green' financial products that close the gap between economic activity and environmental harm. Getty Images

From extreme floods in British Columbia, to severe storms in Toronto and in Atlantic Canada, many Canadians experienced a year of climate-fueled weather havoc in 2021.

As 2022 kicks off, fear of an ever-worsening climate crisis is encouraging more and more and more consumers – along with big investors – to think about conscious, or ‘green’ investing.

For years, scientists have warned of the impending dangers from the unabated burning of fossil fuels. Now, as climate change accelerates to the point of causing irreversible damage to people and the planet, the world of finance is latching on to the urgent need to transition to more sustainable investment solutions – ones that won’t pollute air, water and soil or cost trillions to clean up.

The upshot?

There is lots of money to be made, and investors are getting in on the action.

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“It’s a tsunami compared to what was around a few years ago,” says Tom Rand, a managing partner at ArcTern Venture Capital in Toronto, and author of The Case for Climate Capitalism.

Click to play video: 'More money flowing into net-zero companies amid climate crisis' More money flowing into net-zero companies amid climate crisis
More money flowing into net-zero companies amid climate crisis – Jan 7, 2022

In 2020, green investments rose to $35.3-trillion U.S. in the world’s five biggest financial markets – the United States, Europe, Australasia, Japan and Canada. That sum represented more than a third of all assets in those big markets. Investments in Canada had the biggest growth  – a 48 per cent increase over two years.

There is no doubt a shift is happening.

Read more: What’s the deal with socially responsible investing?

“I think we’re going to see a lot more of that capital flow towards these companies, industries and sectors that are transitioning to … net-zero,” says Tamara Close, founder of Close Group Consulting, a financial advisory firm based in Montreal.

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The question is: is it fast enough?

What is green investing? 

“Green investing is, in my mind, the deployment of capital, whether from individuals or institutions, primarily to resolving the conflict between economic activity and environmental harm,” says Rand.

“Ultimately,” he adds, “that means mitigating climate risk.”

This shift is happening all over Canada.

In Alberta, jobs in the clean energy sector are forecast to grow by 164 per cent this decade, according to Clean Energy Canada, a group that advocates for more renewable energy development in the country.

Atlantic Canada is witnessing its own boom in research and innovation in battery technology to power the next generation of electric vehicles.

Click to play video: 'New Brunswick to set new targets for carbon emissions from power generation' New Brunswick to set new targets for carbon emissions from power generation
New Brunswick to set new targets for carbon emissions from power generation – Jul 20, 2021

But here’s the catch. While change is happening, it’s not happening fast enough to solve the climate crisis.

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Sustainable investments need to grow by orders of magnitude — Rand estimates “on the order of one to two trillion a year every year more than we are [now]” — in order to wean the economy off fossil fuels and toward non-polluting sources of energy.

Read more: Canada on track to reduce fossil fuel use by 62 per cent by 2050

Canada is a massive resource-producing nation. Even though less than a tenth of Canadian GDP comes from oil and gas, fossil fuels power the entire global economy, including Canada’s.

“Fossil fuels built the modern economy. Let’s not pretend they didn’t,” Rand says. “If you run a glass company, or a beer company, or a trucking company, [if] you run a movie theatre. If you use energy, which everyone does, some portion of that energy is linked to fossil fuels. That’s the systemic nature of this problem.”

He says for pension funds and the big banks to divest at a faster clip, the entire economy must shift away from fossil fuels.

“You can invest in a retail store [but] if that retail store is in a province that has a coal-burning plant, you’re not net-zero.”

“Until we get our economy to net-zero,” he says, “it’s a bit like pushing on a string.”

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Environment, sustainability, governance 

The good news is that the international financial sector is seeing the dollars and cents involved in a green transition — and shoveling money into green investments.

Financial heavyweights like Mark Carney, who spearheads the United Nation’s effort toward a renewable energy transition, as well as Larry Fink, who runs the world’s biggest asset management firm, are both vocal about the risk posed to financial markets from a warming planet.

But actually measuring how well a company or fund is doing when it comes to sustainability can be tricky — and greenwashing is a real problem, according to industry watchers and fund managers.

And, they caution, just because a stock or fund is ‘green’ does not guarantee that it will deliver better returns.

But what is clear, says Tamara Close, is that a shift to a non-polluting economy is “putting a lot of pressure on various sectors, various industries and certain companies to come up with a net-zero business model.”

Read more: How to spot ‘greenwashing’ in your ESG investments

Investors typically track a company or fund’s green ‘credentials’ using environment, sustainability and governance (ESG) metrics. There is a range of ways to assess a company’s ESG rating, from how executive compensation is tied to a company’s climate goals, to the environmental chops of its board of directors.

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Though there are organizations that track environmental metrics, ESG disclosure is not a legal obligation for firms or funds in North America (in Europe, firms are starting to abide by legal rules for environmental ratings). Neither is there one set methodology or rubric for assessing a company’s ESG rating.

These are among the blind spots in assessing how sustainable a company or fund actually is. So it’s up to investors, fund managers and individual consumers to ask questions.

Questions like “what’s the intention behind that fund?” says Close. “Is it to actually reduce emissions [and] get behind those companies that are transitioning to net-zero? That’s a very different investment strategy than, say, keeping your investments, but buying offsets, or just divesting from certain sectors.”

But, Close says that what is happening more and more is that corporate leaders are starting to see that ESG targets “are actually a driver for firm value, and for market value.”

In other words, it pays to be green.

The need for regs 

Jessica Dempsey, a UBC associate professor of geography, who studies the intersection of politics and finance, says the biggest gap in green investing is the lack of regulation in the financial sector.

“We’ve left it to [the financial sector] to deal with it themselves,” she says. While showcasing a company’s green innovations or technologies attracts a lot of attention, she says it also takes the focus away from the “political work” of pushing for regulations to help steer the economy and, in turn, the financial sector, toward net-zero.
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Read more: Will Canada’s big banks live up to their climate commitments? Details on plans are thin

That public sector regulation, emphasizes Tom Rand, is critical.

“The private sector is not able to act in cohesion,” he says. “They’re all going to look after their own self-interest; it’s how they’re wired, and that’s what they have an obligation to do.”

Though there are many firms and funds that are putting money in the clean-energy economy, Rand says cohesion is required for the big shift that’s required to actually find its groove.

“When you have a band, an orchestra, you want the trumpets to play in tune with the oboe. You need a conductor. The conductor is the public sector” – meaning everything from international organizations like the World Trade Organization to national and provincial governments.

“Without a regulatory framework put in place by a public sector, it’s going to be very hard to get that massive orchestra playing in time, and playing in tune.”

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