Can capital markets save the planet?

in Industry Insights, 16.11.2021

Tackling Climate Change

31 October 2021 marked the launch of the COP26, as well as closing the third warmest October in recorded history (according to the EU’s Earth observation program Copernicus) with temperatures 0.42 °C higher than the average between 1991 and 2020.

These temperature changes demonstrate the urgency of going beyond governments’ decisions to definitively change behaviors linked to fossil fuel consumption and reduce our human-caused emissions of carbon dioxide (CO2) to net zero by 2050, meaning that the amount of CO₂ emissions you put into the atmosphere is the same as the amount of CO₂ emissions you remove from the atmosphere.

Achieving these goals will require a collective effort, combining strong governments positions (the stake of the COP26) and the way we use our money on a daily basis. Each time we open our portfolio to buy or invest in something, we make a financial decision that may have a negative impact on Environmental, Social or Governance (ESG) factors.

Considering the way we consume and invest will be key to ensuring that we will not further harm our ecosystem.

In this context, the EU Sustainable Finance regulatory plan is imposing more transparency on asset managers related to three main aspects:

  • Sustainability risk consideration
  • ESG performance
  • Impact measurement.

These tenets serve to better guide decision making for investors and to ensure long-term financial stability. The EU Taxonomy Regulation’s definition of asset will help also to identify economic activities that contribute to environmental objectives directly (e.g. renewable energy) or by enabling others (cement or metal manufacturing).

The development of sustainable finance and the increasing appetite of investors create positive impact and beg the following question: Can Capital Markets Save the Planet?

Our findings on capital markets and climate investing

In a joint effort KPMG International, CREATE-Research, and Chartered Alternative Investment Analyst (CAIA) Association examine the role of capital markets in the transition to a low-carbon world. The report, Can Capital Markets Save the Planet? investigates current experiences in climate investing and what we can expect in the next three years, as we move toward a new investment paradigm. The research includes insights from 90 institutional investors, alternative investment managers, long-only asset managers and pension consultants in 20 countries.

The research highlights four key issues:

  1. What is the current state of climate investing?
  2. Based on organizations’ experiences, are global capital markets adequately factoring climate risks in securities prices?
  3. Are capital markets likely to accelerate the pricing process in response to Covid-19 and COP26?
  4. Over the next 3 years, which asset classes are likely to advance further in pricing climate risks?

Capital markets alone cannot resolve market failure and inefficiencies associated with climate change. Rechanneling trillions of dollars of capital toward emerging technologies that could power a low-carbon economy requires huge, concerted action and incentives. As they say, the best way to predict the future is to invent it. Investors can only do that if they foresee benefits. 

What capital markets need most is policy certainty. Without it, some fear a Minsky moment: a collapse in securities’ prices due to sudden panic at some future date as risks build up. Or as said by former governor of the Bank of England Mark Carneyin 2015: “Once climate change becomes a defining issue for financial stability, it may already be too late.”

 KPMG is here to help you make moves toward ESG now – both through our professional insights and through the expert services we provide.

Interested in learning more? Download the full report for the full findings.

Supporting clients with ESG is core to KPMG’s Collective Strategy. Earlier this month, KPMG launched its global ESG strategy. Don’t hesitate to connect with the team to know more.