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April 22, 2022

Doom and gloom or economic boom? Opportunity in climate-positive investment

Each year on 22 April, Earth Day raises awareness for environmental protection and climate action. As extreme weather events intensify and climate catastrophes increase, it is evident that 2022’s Earth Day comes at a crisis point for the planet it celebrates.

The latest report from the Intergovernmental Panel on Climate Change (IPCC) states that only immediate, ambitious action will reduce the greatest risks of devastating climate change. This warning comes as climate change emerges as the defining crisis of a generation and is increasingly included in mainstream discourse. This shift into the spotlight also contributes to making climate change a growing concern in economic financial markets, with clientele and shareholders placing increasing pressure on businesses to align with the shifting culture. It is more and more widely recognized that the action needed to address climate change presents significant economic opportunity to those ready to take advantage of it.

With this year’s Earth Day theme of “Invest in Our Planet” in mind, we assess the economic opportunity and co-benefits of nature positive investment, transitioning to a net zero economy, and strategic climate change adaptation.

Nature-positive investment supports economic growth

Nature is critical to economic activity, with over 50% of the world’s economic output (around US$ 44tn) moderately to highly dependent upon it. We rely on nature at the most basic level for food, water and shelter. It also provides oxygen, supports nutrient cycles, and regulates climate and disease, in addition to holding intrinsic worth as an asset that, beyond its economic use value, nurtures and nourishes us. Presently, biodiversity is declining faster than at any other time in human history, which impedes on nature’s productivity and resilience and threatens corporate and financial stability.

Managing biodiversity-related risks is now a clearly growing concern for responsible investors, financial regulators and companies. Moody’s has found a general lack of disclosures around a company’s commitment to protect biodiversity, and that commitments, where they exist, are weakly implemented. To support the need for better disclosure and data, The Taskforce for Nature-related Financial Disclosures (TNFD) recently released a beta version of a disclosure framework designed to mainstream nature-related risk and opportunity analysis into financial decision making. The framework assesses nature-related opportunities in two ways, including where organisations mitigate nature-loss and where they create products or services that actively halt or reverse nature loss. Consistent disclosure on how companies act on these opportunities will provide transparency for investors to align their financing with nature-positive activities.

Beyond protecting prosperity derived from natural capital, increased investment in nature-based solutions represents a significant opportunity for economic and social benefits. Investing in conserving and restoring natural assets is predicted to help alleviate poverty by supporting low-income economies and communities where natural capital directly provides the bulk of wealth and jobs. Investment addressing biodiversity loss can also contribute to climate change mitigation and adaptation, adding to the economic gains from climate action.

Short-term cost of climate mitigation is outweighed by overall economic benefits of limiting warming

Transformation of carbon-intensive activities is critical to achieving net zero and preventing the worst impacts of climate change. While action needed to contain warming to 2°C would limit economic growth by an estimated 1.3-1.7%, the latest IPCC report finds that such potential loss is likely outweighed by the economic benefit of limiting warming. Moody’s finds that the economic benefit from the transition to net zero could reach nearly 25% cumulative GDP gain over the next two decades compared with a scenario in which the world fails to act.

The carbon transition will be a key factor in corporate competitiveness, as investors increasingly scrutinise net zero commitments and assess climate-related risk and opportunities. In its report, Ready or Not? Moody’s finds that early action, in the 2020s, halves a company’s probability of default and improves financial performance when compared with delayed action.

Companies with clear commitments to net zero will also benefit from positive reputational effects and likely increased market share. Generation Z, now maturing into adults, have demonstrated a widespread commitment to making choices that align with their values, including sustainability and reduced carbon footprints. Consumers across all generations are increasingly willing to pay more for a sustainable product, with 90% of Gen Z happy to pay 10% more.

As investors and lenders strive to meet their temperature targets, there are significant economic and financial opportunities from investing in clean energy and sustainable products, with demand for climate-friendly goods and services expected to continue to increase. In the five years leading to 2021, online searches for sustainable goods rose 71% globally.

Adaptation efforts present significant investment opportunities

Greater financing is needed for both mitigation and adaptation to climate change. Presently, public spending on adaptation and resilience is considerably lower than for mitigation. Of US$632Bn in climate finance tracked by the Climate Policy Initiative, only US$46Bn was directed to adaptation initiatives. And although only 3% of green bonds were allocated to adaptation projects in 2021, the UNEPFI has estimated that the annual cost of adaptation will be between US$140Bn-US$300Bn by 2030. This represents a significant investment opportunity with both direct and indirect benefits, as adaptation projects can be a cost-effective way of protecting communities while promoting economic development and growth.

Timely adaptation measures can help to reduce increasing costs from damage and disruption, and save repeated repair costs. Investing in regional resilience, such as urban cooling efforts or flood mitigation along a transportation corridor, helps ensure business continuity by supporting worker health and minimizing supply chain disruptions. Effective adaptation projects, planned based on forward-looking climate data and considering local characteristics, can also generate multiple additional benefits such as improving agricultural productivity, innovation, health and well-being, food security, livelihoods, and biodiversity conservation.

In sum, investing in natural capital and climate change mitigation and adaptation solutions presents enormous opportunities not only for a more sustainable future, but also to safeguard communities and economies in the shorter term.