In the Industry: Q1 2024 Impact Digest

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We’re excited to bring this quarterly digest to you for the first time as LNW. If this is your first time receiving it, we hope you enjoy this recap of significant news and research from around the impact investing space. We’re also pleased to share that our San Francisco office has once again been recognized as a Green Business Innovator by the City and County of San Francisco. Green Business Innovators are the highest level of Green Business certification and are recognized as leaders in their industry, setting an example for how businesses can operate with sustainability as a core practice.

December’s COP28, the UN-sponsored climate change summit attended by 154 heads of state and government leaders, served as another sharp reminder that more aggressive actions to mitigate climate change must be taken, and soon. Financing green initiatives that could reach the Paris Agreement climate change goals was a major topic of discussion at COP28, both in terms of government funding commitments through the UN Green Climate Fund and other initiatives, and the need for continued involvement by the private sector to fund climate change mitigation and green transition projects. The biggest banks in Europe are beginning to make strides in shifting their funding towards green projects and away from fossil fuels; this is hopefully just one step in realizing that environmental progress, like progress in other areas of impact, is just good business.

Global Clean Energy Spending Surges to $1.8 Trillion. It’s Not Enough

Total spending on the green energy transition surged 17% last year to $1.8 trillion, reflecting the growing urgency of international efforts to combat climate change. These include investments to install renewable energy, buy electric vehicles, build hydrogen production systems and deploy other technologies. Add in the investments in building out clean-energy supply chains, as well as $900 billion in financing, and the total funding in 2023 reached about $2.8 trillion.

However, the world needs to be investing more than twice as much in clean technology in order to reach net-zero emissions by mid-century. Total spending on the energy transition last year was well short of the estimated $4.8 trillion that will be needed annually from 2024 to 2030 and investments need to surge by 170% to get the world on a net-zero pathway. Investments in the U.S., the UK and Europe grew by at least 22%, to a combined total of $718 billion. That was driven in part by incentives in the Inflation Reduction Act, the flagship U.S. climate law, which is starting to have a significant impact.

Strong sales of electric vehicles in the UK as well as booming demand for renewables across Europe also helped drive up the total. Electric vehicles, renewable energy and power grids were the three largest markets, representing a combined $1.5 trillion. Some nascent technologies also saw torrid growth. Hydrogen investments, for example, tripled to $10.4 billion in a sign of increasing interest in the technology, though it has yet to be proven at scale.

Morgan Stanley
Individual Investors’ Interest in Sustainability is on the Rise

Individual investor interest in sustainable investing is high and rising, according to a new “Sustainable Signals” report by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Wealth Management. The survey polled 2,820 active individual investors across the U.S., Europe and Japan to assess interest in sustainability and understand where investors see the most opportunity and potential risk.

Some key findings:  More than three quarters (77%) of individual investors globally are interested in investing in companies or funds that aim to achieve market-rate financial returns while considering positive social and/or environmental impact. In addition, more than half (57%) say their interest has increased in the last two years, while 54% say they anticipate boosting allocations to sustainable investments in the next year.

Climate action is a key issue, with 15% of those surveyed ranking it as their top sustainable investment theme, but that doesn’t leave traditional energy off the table – 51% of respondents would consider investing as long as robust plans to reduce emissions and address climate change are in place. Transparency and concerns about greenwashing were also top of mind, with 63% of responders citing a lack of transparency and trust in sustainability reporting as a concern and 61% expressing concerns about greenwashing.

Wall Street Journal
Forget the Term ‘ESG.’ But Don’t Ignore the Power of the Concept.

A gauge of corporate effectiveness from the Drucker Institute at Claremont Graduate University suggests that CEOs and companies who integrate ESG considerations into their business are engaged in nothing more than good management. The institute’s model measures how companies fare across five areas: customer satisfaction, employee engagement and development, innovation, social responsibility and financial strength. Those categories are then combined into a cumulative score that measures overall effectiveness. The results underpin the Management Top 250, an annual ranking produced in partnership with The Wall Street Journal.

For the 50 companies showing the biggest gains, the social responsibility category was the leading factor in their rise. The exact relationship between social responsibility and the other four areas in the model varies, but “in general, better responsibility and better sustainability means better cash flow, better risk management and better value creation,” says R. Paul Herman, the CEO of HIP Investor, which is one of the suppliers of data for the rankings.

Big U.S. Fund Companies Retreat on Support for ESG Proxy Votes

Increasing political hostility toward the consideration of ESG issues in investing appears to be translating into sharply declining support for ESG shareholder resolutions from the biggest U.S. fund companies. American Century, BlackRock, Capital Group, Goldman Sachs and Janus Henderson exhibited some of the most significant declines in support for key resolutions. This is despite some significant commitments in previous years to stronger support for DEI and environmental initiatives in particular.

At the same time, European asset managers have maintained a high level of support for ESG-related shareholder proposals. In contrast to their U.S. peers, all 15 of the European managers reviewed show consistently very high support for key ESG resolutions. As a result, sustainability-focused investors are increasingly questioning whether their managers’ voting policies are well-aligned with their own environmental and social objectives.

Natural Disasters Led to $250 Billion in Global Losses Last Year

Extreme storms and other natural disasters cost the world about $250 billion of losses last year, with only $95 billion of that actually covered by insurers. That total exceeds the 10-year average and includes catastrophic losses caused by major earthquakes in Turkey and Syria. The U.S. had a less severe hurricane season than in 2022, with many insured losses instead stemming from regional thunderstorms. As the number of thunderstorms and the resulting damage increases, insurers may be forced to consider them a more significant threat in their risk analysis.

In 2023, insured losses from severe thunderstorms hit record highs of $50 billion in the U.S. and $8 billion in Europe. Scientists are already predicting that 2024 will be hotter than last year, increasing the likelihood of more extreme weather events. The impact of climate change has major implications for the insurance industry and how they cover claims, with the Bank for International Settlements recently warning that governments are increasingly being left to foot the bill.

World’s Biggest Banks Made $3 Billion on Green Debt in 2023

For the second year in a row,  global banks made more money underwriting bonds and providing loans for green projects than they earned from financing oil, gas and coal activities. The world’s biggest lenders generated about $3 billion in fees last year from lining up debt for deals marketed as environmentally friendly. By comparison, the sector brought in less than $2.7 billion in aggregate earnings from fossil-fuel transactions. European banks led the transition, led by BNP Paribas. Wall Street dominated fossil fuel finance, led by Wells Fargo and JPMorgan Chase. The development coincides with stricter regulations in Europe, where regulators have made clear they want the finance industry to speed up its green transition. According to an analysis by BloombergNEF, four times as much capital must be allocated to green projects as to fossil fuels by 2030 to align with net zero emissions targets.

Global Sustainable Investment Alliance
Global Sustainable Investment Review

The GSIA recently released their sixth biennial report on the impact investing space, in which they found that $30.3 trillion is invested globally in sustainable funds. This figure reflects a decrease in total assets, particularly in the U.S., as a result of continued efforts within the industry and regulators to define sustainable investments more carefully and consistently and address greenwashing. In non-U.S. markets, sustainable assets under management have increased by 20% since 2020.