Connecting the dots between finance and climate change
More often than not, when we think what we, as individuals, can do to fight climate change, the first thing we think of is adjusting our consumption behaviour. We start reducing, reusing, recycling. We start consuming “eco-only” and switch to fair-trade coffee, reusable mugs, trains instead of planes, and meat-free diets.
Such behaviour, of course, can significantly reduce individual carbon footprint.
And yet, eco-consumerism does NOT equal eco-activism.
In fact, consuming consciously, while overall a worthy thing to do, is just a tip of an iceberg of what individuals can do to fight climate change.
The truth is, we’re all pretty clear on the impact of our spendings and how those spendings affect climate change. Yet, it is our savings and investments that play a crucial role in mitigating the climate crisis — but somehow, we’re not talking about this.
To answer this question, let’s take a deeper look at the connection between finance and climate change.
1. How can I reduce my carbon footprint and save money?
2. Why saving money in the bank isn’t environmentally friendly
3. Not all “good” companies are created equal
Money — whether you spend it, save it, or invest it — will always have a footprint.
But what kind of footprint? And can you generally measure the impact of money when it comes to climate change?
Apparently, you can.
Let’s say, a household or individual has €10,000 saved or invested into a MSCI world index fund, for instance. That money then has a footprint of approximately 1.8 tons per year.
Switching from an average petrol-powered car to electric, for example, saves on average 1.3 tons of CO2. If you avoid one transatlantic flight from, for example, Helsinki to New York, that impact is close to 1 ton of CO2e.
This means that changing your investments to be carbon neutral results in a way higher impact than changing your consumption behaviour.
In a funny way, we almost think that, if we buy fair trade coffee in a reusable mug, we’re somehow saving the planet. And at the same time, we might have investments in unsustainable tech companies, or money saved in a bank account that invests in fossil fuels — which is rather counterintuitive.
Why do we think that our choice of a four dollar shade-grown fair trade artisanal cup of coffee in a reusable mug matters, but what we do with 4,000 dollars in our investments account doesn’t?
— AUDREY CHOI, CHIEF SUSTAINABILITY OFFICER AT MORGAN STANLEY
It’s somewhat of a wake-up call to realize that if you do nothing with your money, someone else will do something with it. If you’re not in control — someone else will take control. And it’s going to be banks investing into what they see fit, financing projects that they benefit from.
Most people aren’t aware that banks are businesses like any other. And, like businesses, banks also invest their money or support certain companies or industries.
Banks can’t make money — until they have your money. By saving money in the bank account you’re actually lending that money to the bank. So, in actuality, you’re never saving, but you’re always lending. And losing.
Take German households, for example.
According to Deutsche Bundesbank, private German households hold a record of €6.7 trillion in total assets (including investments), out of which ca. €2 trillion is lying in their savings accounts. Germans love saving — yet they’re losing money instead, since the returns on their accounts actually turn negative 0.8% after subtracting the 1.7% inflation rate from the nominal interest paid.
(Meanwhile: DAX is on the rise, so all that money, if invested, could have generated a significant return.)
The German love affair with the piggy bank is so strong, it seems that an almost guaranteed loss of almost 1% is still preferable to a potential loss in a stock market, even at the cost of a higher potential gain.
Another thing to remember is that we’re all part of the system, even if we think we aren’t.
Even those who say “I don’t care about the financial word, I don’t invest, so I have nothing to do with it” — you’re still part of it. The simplest example is if you have a job — you pay your pension rate in a pension fund, and the latter have a massive power in the finance industry. If you hold money in a bank account, you’re part of the system.
Remember that 2017 article in the Guardian that said that “100 companies are responsible for 71% of global emissions”?
It has become one of the most common phrases in the discussion about climate change, particularly within debates of personal responsibility. After all, if over 70% of emissions come from these companies, what difference can individual action make?
While many quote this stat, it is actually incorrect.
In fact, of those 71% of emissions attributed to 100 companies, over 90% is actually emitted by us, people. It’s going into heating our houses, driving our cars, making steel and aluminium for our buildings, cars, concrete for the roads, bridgets... Those 100 companies do exist — but who is ultimately responsible for the consumption of what they’re producing?
That famous Guardian article ignores a very important point: breaking down emissions into Scopes. For gasoline, for example, Scope 1 is the corporation extracting the gas and shipping it to the pumps, while Scope 3 is consumers putting that gas into cars and turning it into CO2. (Spoiler alert: up to 90% of the total carbon impact is Scope 3-related.)
Of course, the finding that 100 corporates are responsible for the majority of fossil fuel and cement production emissions is substantial. These industrial producers should be held accountable because many of them (like Shell) have known since the 1960s what impact their products would have on climate — and spread misinformation to delay climate action in order to surge their profits.
But at the end of the day, it’s consumption that drives markets, not production.
The food industry is a great example. Brands like Oatly and Veganz didn’t appear out of nowhere — there was demand first. Consumers wanted to have specific products on the market, et voila.
Of course, changing the entire system isn’t going to happen overnight. It would take longer than 2050 to make that happen. But it’s important to acknowledge that the change is already happening. There are more and more companies taking action, more Science-Based Targets’ initiatives, more climate impact metrics applied. Whether it is to avoid climate risks or for sustainability criteria, more and more companies have understood that they need to change in order to adapt.
In the last few years, shareholder activism has been bigger than ever, giving us concrete examples like British Petroleum or Shell which were faced with having to take better climate decisions, simply because they were pressured by shareholders. BP, in fact, is a classic example of how shareholders pushed the corporation to build a carbon reduction plan aligned with the Paris Agreement. In the case of Shell, its executive compensation is tied to carbon emission targets, which puts tangible pressure on high-execs to deliver.
Now, the juicy part. What exactly should we all be looking out for if we want to be climate-friendly investors?
Solar. Wind power. Veganism. These are the first things that often come to mind. But are they all necessarily 100% sustainable?
LIke so often in the battle against climate change, things are never black and white.
There can be, say, a tobacco company with a really low carbon footprint, using renewable energy. But would that be a sustainable company, if its very product is polluting the world? And then there can be someone making hospital equipment to save human lives — but the company has a very high footprint. Does this make it a bad company to invest in?
At Cooler Future, for example, we rely on the UN Global Compact Principles, which automatically excludes companies that, for instance, produce all of their energy through fossil fuels, coal, etc.
Yet, it’s a common misconception that it’s only those companies that produce “good products” that are ultimately good. If we are going to fight climate change, we’re going to need a lot of resources across a lot of industries. We’ll still need to build houses. We’ll still need energy. There’s a lot of innovation going on even in the industries typically considered as being “bad”. Orsted, a former oil giant turned green energy provider, is one of the greatest examples.
To drive a truly major impact, we need to find the companies that take climate action seriously and back it with targets and numbers across the industries. And in any industry, you can — and should — find the best-in-sector companies that do their best effort of reducing their carbon footprint. Why? Because it is simply not possible to save the planet by investing into only one industry we deem clean. If we want the world to transition into a greener future, we need to allow all industries to undergo that transition, too.
The thing that is somehow oddly misunderstood in the financial markets (and often by many investors) is that they look at today’s performance regarding emissions, instead of predicted future results. It is, of course, good that we measure “the footprint of today”, but what about the footprint of tomorrow?
If impact investors truly want to make a difference, they need to support companies in transition — those that have just begun their journey on lowering the emissions and, while they might not be perfect just yet, are still doing concrete actions aimed at protecting the environment.
It is dangerous to look at current performance only, whether it is finance- or climate-related. Both are ongoing things that need the right time horizon and constant following up. Both investment as well as impact decisions are investments for the future, not to the status quo.
At Cooler Future, our vision is to do our share in stopping climate change. Yet, instead of focusing on eco-consumption, we’re challenging the finance and investment world to address their role in climate change — and encourage everyone to take control of their money and start investing in companies that are serious about their footprint reduction.
After all, isn’t it time we start voting with our investments like we vote with our fair-trade coffees in reusable mugs?