Investing in solutions to climate change is no longer a radical act; and that’s progress.
As climate investing pushes into the mainstream, it’s more important than ever to recognise the spectrum of motivations and styles of investing that claim to contribute to reducing the effects of climate change.
Tideline’s latest paper, Truth in Climate Impact, explores this topic with customary sophistication. It first lays out the evolution of global reporting and disclosure norms for climate-related risks.
Then going deeper to offer nuanced categorisations of climate-impact-investors, from “climate-integrated” to “climate-focused” investors.
Three differentiating factors are identified:
- Active measurement and management
Categories are Still Complicated
Responsible investors have long wished for a universal set of definitions (a taxonomy) to drive broader engagement, and to boost data-quality for effective investment decision making.
Progress has been made, but there is still a frustrating lack of alignment (an apparent communication) between the leading global standard setters.
The Tideline report offers a useful visualisation of the current state of ESG taxonomies.
The IMP’s Avoid, Benefit, Contribute (ABC) model sits along the top, overlaid with estimations of where the key factors in the new emerging models would sit.
Both the SEC (US) and the SDR (UK) have chosen to use the word ‘focus’, but sadly they appear to have different meanings as they sit at different ends of the spectrum.
Terminology matters, and right now we have a rare opportunity to build and influence the models that will define the future of responsible investing. Let’s hope these groups can communicate and align their definitions a little better.
‘Climate-Integrated’ and ‘Climate-Focused’ Investors
Responsible investing is the baseline, and the above ESG categories have the power to impact all investors in their relevant regions.
But of course climate-impact-investors go further. They utilise varying degrees of: intentionality, contribution and active measurement and management, to pursue positive climate ‘outputs’, at least, and positive climate ‘outcomes’ at best.
Tideline differentiate the degrees of climate impact investing as starting with those that are ‘climate integrated’, the report explains;
“Climate-integrated investors are likely to consider ESG inputs and outputs in their investment process and often have clearly articulated company- or portfolio-specific goals related to environmental action, but their investment universe is broad, emphasizing measurable operational benefits or avoidance of harmful activity.”
Leading practitioners will go deeper, they’ll have greater ‘focus’ on real-world outcomes, using a mix of quantitative and qualitative data points;
“Climate-focused investors likely have a foundational ESG integration process in place too, but their primary concern is partnering with companies whose commercial success is fundamentally dependent on achieving improvements on climate-related targets, and vice versa.”