The case for broader investment in climate resilience
The case for broader investment in climate resilience
A new research paper makes the case that climate resilience is an area of opportunity for big-time institutional investors — like pension funds and 401(k) retirement plans. The report argues the urgency of climate change is making companies with climate solutions attractive options for asset managers beyond private equity and venture capital.
Jay Koh is managing director of the Lightsmith Group, a climate-focused private equity firm that provided data and analysis for this report. He spoke with “Marketplace Morning Report” host David Brancaccio, and the following is an edited transcript of their conversation.
David Brancaccio: The paper argues that investing in climate solutions is not oh-so-2018, back before social investing got repoliticized. But that there are possible returns for climate-aware investing that should, what, now be attractive to the biggest, most sophisticated investment firms?
Jay Koh: Yeah. The paper says climate resilience is an investment opportunity, a growth investment theme, if you will, that’s equivalent to, and even intertwined with, the decarbonization investments that you see happening all around us. Fundamentally, climate impacts are now inevitable, to some degree, until 2030 at least. And therefore, there’s an opportunity to invest in technologies and solutions that help us understand those impacts and help us to manage and even transcend them.
Brancaccio: What do institutional investors — I mean, this could be an entire country’s sovereign wealth fund or a union’s pension or a state employee retirement fund — what do they look for when evaluating investments?
Koh: One of the things that’s very important is not only the macro trend of is climate change happening or not and do we need solutions or not? But is it investable? And this is a paper that answers that question, I think, for the first time.
Brancaccio: Let me understand this better. At a time that an investment company like BlackRock, while it’s sticking with its environmental, social, [governance]-type strategies, it’s now going to shy away from using the term “ESG” because the BlackRock CEO [Larry Fink] thinks the term has been, in his words, “weaponized” politically. You’re saying, all that aside, your research says there are potential returns there that are investable. Companies are doing this already, if you want to be a part of it.
Koh: Yeah. One way of thinking about it is your understanding of climate change may be higher than almost any other set of investment factors you’re thinking about. So I don’t know what’s going to happen with interest rates or inflation or consumer behavior. But between now and 2030, I have a pretty high conviction — and so does the science — that climate change will continue to unfold. And at that rate, there will be increasing demand for technologies and solutions that help us understand everything from how much wildfire risk we’re going to have to what kind of respiratory impact that will have as a result, and where we should be thinking about the supply chain being disrupted, food being produced, water being generated and even our housing being valued going forward.
Brancaccio: I was reading this metaphor that you’ve used. MacGyver and McFly. MacGyver was the guy who was able to enterprise solutions in real time. And McFly, of course, “Back to the Future.” But tell me about the metaphor and how you think about that and what it teaches us.
Koh: Yeah, MacGyver is — you know, I’m a child [of] the 1980s, obviously — tells us that you can take the technologies and solutions lying around right now and begin to solve the problem. We don’t have to wait for some sort of magical, absolutely new technology, though that will certainly help us going forward. But we have technologies right now that help us deal with the issues that are going to be impacted by climate change.
Angus MacGyver, in the “MacGyver” TV show: All right, MacGyver, think. Rope. A smoke alarm. Sheets of plywood. Yeah, just might work.
Koh: So climate change is not an aliens-landing-on-the-Earth kind of risk. It’s not a risk that we’ve never seen before. It’s kind of taking all the existing risks — whether it’s fires or storms or floods or impact to agriculture or health care or the energy system or transportation — and scrambling all of them. We manage all those risks today. So we just need to scale up the tools that we have that exist right now. And this study shows that there are at least 827 companies that have those types of solutions that you can invest in out of your 401(k) today.
The McFly analogy, having just seen the “Back to the Future” musical yesterday with my now 13-year-old son and a bunch of his friends, is really saying, if we went back in time from the future to this day, what would we actually tell ourselves that would actually prepare ourselves for that potential future?
Dr. Emmett Brown, in “Back to the Future”: It just might work. Next Saturday night, we’re sending you back to the future!
Koh: You know that by 2030, climate change will be pretty substantially different than it is right now. And you can read the [Sixth Assessment of the Intergovernmental Panel on Climate Change] to explain exactly where and when that’s going to happen. But now knowing that future, we can pretend that we’re going back to today’s date and think about what investments we’re making, what technologies we’re solving for, what entrepreneurship we’re orienting at so that the 2030 that we end up in is a better one than the one that we started with.
Brancaccio: You mentioned a list of firms. What is that list?
Koh: So the study has identified that there’s at least 800-plus companies in the public markets that can be found by applying this approach of looking at where climate change is going to happen and what risks are being increased by climate change, and then matching that against the kinds of technology, solutions, products and services that the companies that are traded publicly actually explain that they have.
Most of the companies, it’s important to say, today wouldn’t call what they do climate change anything. But they have technologies that help us understand how risks are changing. How fire risk is impacting insurance, for example, or how to manage our supply chain in the face of disruption — not just because of COVID or sanctions, but also now because you can’t push barge traffic down the Mississippi River anymore [because of low water levels].
So these are companies that have been identified through this approach. And it sort of explains that if you took a similar approach as an investor, and different investment managers may do this, you could generate the same type of investable universe and begin to select companies that people can invest in today.
Brancaccio: I mean, you’d think that the companies involved would tout the climate benefits. It’s interesting you have to, essentially, uncover them, do some digging.
Koh: Yeah. I think right now, most companies are just beginning to become aware of the fact that their solutions and technologies can be described as supporting resilience, if you will, or climate adaptation. Most of them consider what they do simply to be risk management. How do I manage my supply chain better? And then how do I start to do that when I now see fires across the Pacific Northwest, or, you know, even the Texas freeze? I think probably within five to 10 years, people will describe what they do is managing climate-related risks in the same way they manage all kinds of other risks.
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