The time is now for responsible investing: but we need governments to act

• 14 Nov 2016

The time is now for responsible investing.  It is no longer an investment approach that is pursued only by niche, ethical or impact investors.  Responsible investing is going mainstream.  But, with the world facing unprecedented challenges, we need so much more. Industry action is critical but we cannot rely on a market-led transformation alone – our governments must take the lead.

Despite the rationale behind why climate investment makes sense, much more is needed.  Let’s start with a significant shift in investment patterns and a scale-up in investment volume, of the size required to meet climate and energy goals committed to under the Paris Agreement. These goals can only be achieved if governments rapidly create the right type of investment environment.  And this means incentives and mechanisms to facilitate private sector engagement and capital flows.

Governments urgently need to put in place policies that support the development and deployment of renewable energy and energy efficiency technologies in parallel with measures to reduce fossil fuel dependencies. A really important first step is to stop providing subsidies and market incentives to fossil fuel companies. Period.

Subsidy funds can then be re-directed towards other mechanisms, such as fiscal measures, to support the rapid uptake in climate friendly technologies. And let’s not avoid the obvious – carbon pricing is also crucial to addressing climate change.  The longer governments do not take action on tackling this market failure, the longer investors will be unable to accurately price in the risks.  Carbon markets, love them or hate them, must be part of the solution.

Investing sustainably and responsibly is going mainstream in part because there is a growing awareness of the massive risks of not doing so.  Examples such as major pension and endowment funds divesting out of fossil fuel companies and of the soaring demand for environmental, social and governance (ESG) funds are evidence of this.  Investors are reducing their risks.

But strong government action is urgently needed to create a basis for investors to seek out opportunities that have a production and consumption profile more aligned with a low carbon, low pollution, and resource efficient future.  Against the ongoing backdrop of international climate negotiations, investors can and will play their part in building a sustainable and responsible future.  We are doing so.  But so too must governments.