Can the way you invest have an impact on climate change?
In the recent Cooler Future podcast episodes, we have gone on a journey from how to start investing, to the changes in ESG regulations, to discussing how money can be a driver for a better future for all.
In the 9th episode of the podcast, we dove deeper into the climate impact of money and investing. We spoke with Hanna Värttö — a seasoned sustainable finance expert and the Impact Lead at Cooler Future — about the challenges, ideas, and the future of generating climate impact through investing.
If you're more of a reader than a listener, we've got just the thing for you! Read on to get a quick summary of the topics covered in the podcast episode. 😎 Otherwise, listen to the full podcast here:
1. Impact is driven by investors’ own goals, engagement opportunities and risk appetite - Any investor from retail to professional can aim for impact in different ways through choosing the right products and engagement. While an individual investor might have limited engagement opportunities, as a community even private investors can drive change.
2. Effort is needed from anyone aiming to invest sustainably or to create impact - it’s not enough to just invest in a fund that’s named sustainable or green. Any investor who wants to invest in companies that create positive impact needs to do their homework and study numbers & strategy of the companies or funds investing into.
3. More standardisation and common ground for metrics need to be found - currently comparing investment products and companies is tricky due to different methodologies and data sources. More norming needs to be created jointly to achieve sufficient levels of transparency for investors to base their decisions on.
4. Transition and impact analysis needs to be part of financial decisions - to create more impactful investment products, climate and impact metrics and analysis need to be part of every day management of the companies as well as the investment products to align with climate and impact goals. Just like financials, also the climate & sustainability metrics need forward looking analysis.
Based on the previous episodes, the discussion starts on the different ways and levels of generating impact through investing. Hanna opens up how different investor-specific decisions and capabilities, like willingness to take risks and the amount of money to be invested, already affect the type of impact an investor can expect to generate. However, in defining impact, by choosing the right impact targets and products, both an individual investing 50EUR and a professional Venture Capitalist investing millions can help create impact. The key to this is additionality. How does the investor’s money, and even more so, other actions affect the impact generated?
When talking about publicly-listed assets, we should be talking about engagement. While money alone, especially from individual retail investors, might not directly contribute to the company invested into to change their behaviour. The collective power of the community of individual and professional investors can drive the change if the impact targets are clearly set by investors and the engagement is active. This means, however, that the individual investor needs to invest in products that are built with active engagement as part of their investment process.
The point about investor engagement brings us to two other important points of discussion from Hanna. Let's start with the first one, metrics.
While more and more data is available, the metrics used to measure climate performance and the impact of companies and investment products differ. A clear standard on how to measure positive investor impact is missing, which makes comparing different investment products quite difficult. Popular portfolio metrics such as alignment with Paris agreement goals or below two-degree alignment, for example, can be measured but the underlying data and methodologies for producing the metrics vary. This makes comparisons across companies and investment products challenging. Even though alignment metrics would show how far off companies or investment portfolios are from the Paris goal to limit global temperature warming to 1,5C compared to pre-industrial levels, they do not give much insight on what investors should do with the alignment or misalignment.
And what is important again is to differentiate what is caused by the company themselves without investor involvement and what is driven by active investor engagement. According to Hanna, measuring the results of engagement efforts is a tricky one, but a key one to really understand the impact investors can have.
The second important point that touches all of us, is the comparison to where our money is in general. Hanna points out that while as individuals we are used to measure e.g. the footprint of our consumption, the footprint of our investments is too frequently left out of the equation.
When talking about climate screening and continuing the discussion on the measurability of impact, Hanna also opens up on the ways she feels impact should and could be measured. The key factor is for investors to identify and support companies across different sectors that are prepared and willing to adjust their business models according to climate change. This includes taking into account different types of risks from transition-related risks to physical risks, but also the ways the company can create advantages in the market by taking climate change into account in their strategy.
When talking about the ways Cooler Future wants to change the way impact is measured and reported, Hanna dives also into the challenges of finding the respective companies and investment products that are taking climate change seriously. It is currently a big task for individual investors to dive into the metrics, investor initiatives, strategy and so on.
Her vision is to make this readily available for individual investors on the Cooler Future platform and generate more transparency on climate performance and impact. She believes that a rigorous process, that starts from negative screenings and exclusions to make sure that no harm is done, is the starting point. This then needs to be continued by a scoring model to detect companies that are expected to perform best in the future in relation to their climate actions. Finally, the climate score should not be only a side metric but an ongoing active metric next to risk & return in portfolio construction.
After all, Hanna rightfully points out, just like in investing, also the impact side should be not only considered based on status quo but as a forward looking transition item.
In this podcast episode, we talked to our Impact Lead Hanna about how private investors can also make an impact. Even without thousands of euros in capital.
It is important that investors show interest and willingness to learn about investment products. We also need to continue our efforts to establish standardised metrics so that the industry can become more consumer-friendly.
Hanna hopes and believes that transparency, consistency in defining what is impact, working together on building common ground and bringing that knowledge to a wider public audience will lead to more investors focusing on the climate impact side of investing, establishing a global standard of it and building a cooler future.