Consider these statements:
“Climate Risk Is Investment Risk.”
“The climate crisis poses enormous financial risk to investment managers, asset owners, and businesses. These risks should be measured, disclosed and mitigated.”
“It’s a time of both peril and possibility. Climate change is a societal risk but also a generational investment opportunity.”
Those three quotes aren’t from environmentalists or alarmists. They come from Larry Fink, who stewards over $9 trillion in assets under management, António Guterres, the Secretary General of the UN, who called its latest climate risk report “a code red for humanity,” and Jim Coulter, who announced a first close of $5.4 billion for TPG Rise Climate to invest in innovative businesses, with capital commitments from limited partners that collectively manage more than $3 trillion of assets. Our leaders are leading.
It comes not a moment too soon. There were thirty named storms last hurricane season. That set an ominous new record, as did the five that hit my home state of Louisiana.
Then, Hurricane Ida strengthened into a nightmare storm almost overnight. Fueled by warmer waters, it grew in just seventy-four hours from Tropical Depression Nine to become the fifth most powerful storm ever to hit the mainland United States. In fact, the protection that saved New Orleans only withstood the storm because the Army Corps of Engineers overbuilt the levees after Katrina, as one senior engineer revealed a few days ago.
Larry Fink was right when he deemed climate risk as investment risk last year, while insisting that addressing climate change required “a fundamental reshaping of finance.” The assessments from Guterres and Coulter came in recent weeks. They’re right, too. Rather than myopically focusing on shareholders alone, investment managers are now considering their impacts on multiple stakeholders (such as employees, the community, and even generations to come) as key to long-term business growth, innovation, and value creation.
Impact investing is increasingly becoming, simply, smart investing. The funding commitments are real, the leadership is preeminent, and all these trendlines are promising.
Our leaders are finally leading.
Why finally? Here’s another quote worth considering.
“When companies proactively integrate environmental and social impact into their business models, they are well positioned to provide investment performance over the long term as well as to affect corporate and ultimately market behavior for the greater social good.”
That one comes from Kris Balderston and Lala Faiz – nearly a decade ago.
They served in the Office of the Secretary of State’s Global Partnership Initiative, which hosted the Secretary’s Global Impact Economy Forum in April 2012. It certainly wasn’t the first conference on impact investing (the Social Capital Markets Conference, or SOCAP, dates back to 2007) and the State Department hosts events all the time. So, what made this one stand out? Two reasons.
First, Kris and Lala were ahead of their time by arguing that threats to the environment, society, and governance (ESG) were, first and foremost, risks to U.S. businesses and America’s overall economic growth. “That’s why the US State Department is focused on the impact economy,” they explained, “because we believe that the more the market moves toward incorporating the externalities of doing business and advancing the impact economy, the more our foreign policy goals of good governance, stability, and inclusive economic growth are accomplished.”
Government is often derided as backwards, broken, and bureaucratic. In this case, their efforts were innovative and influential.
Second, Kris and Lala did far more than just host a conference and author an op-ed. Behind the scenes, they did the hard work that few noticed to engage an array of stakeholders. Diplomacy is a lot like hospitality: what matters most involves who gets invited, what’s on the agenda, and especially what new relationships and deals result.
Kris, Lala, and their State Department colleagues from the Global Partnership Initiative often talked about four C’s: convening groups from different sectors and geographies, collaborating to develop best practices and common objectives, catalyzing new projects that would create shared value among them, and cultivating the most innovative ideas by connecting entrepreneurs to networks of mentors and investors.
That led to more deeds than words. Since 2009, the office has mobilized over $3.7 billion in public and private resources for diplomacy and development and worked with over 1,600 partners from around the world, all in a nonpartisan and pro-American way under multiple Republican and Democratic Secretaries of State. Their efforts also contributed to changing the zeitgeist that ESG would improve “investment performance over the long term,” in Kris and Lala’s words, “as well as to affect corporate and ultimately market behavior for the greater social good.”
They were far ahead of their time.
Now, climate risk has never been more apparent, and fund managers have never been more focused on investing in a better future and supporting the entrepreneurs who will create it. Those efforts will require an all-hands-on-deck approach.
When Hurricane Ida knocked out power for over 1 million Louisianians, including the entire City of New Orleans, 30,000 line workers from forty states came to Louisiana to work around the clock to restore power. Local community organizations have also stepped up, working alongside global nonprofits like World Central Kitchen, which has served over a hundred thousand meals across southeastern Louisiana. As Cleo Robinson (from the great New Orleans restaurant Dooky Chase) told Chef José Andrés, “I don’t care what you have or you don’t care what I have, but we become a unit for the common good, and spreading love. Isn’t that just fine and dandy?”
That barrier-breaking approach will increasingly become a business necessity. Even with the UN warning us that “greenhouse gas emissions from fossil fuel burning and deforestation are choking our planet and putting billions of people at immediate risk,” we can also imagine new ways to build cross-sector partnerships and use business, the greatest wellspring of innovation known to man, to save the world and ourselves.
Companies must increasingly choose to address risks – to create a safer environment, a healthier society, and better governance – for business reasons, because failing to do so will endanger long-term value creation and America’s prospects for economic growth. Such risks present real and present dangers to investment value. Yet if we can forestall them, or even innovate to avoid and overcome them, we can create societal value and new economic value.
It will be better business, in both senses of the word.
It is the job of every investor to understand that. Just as it is the responsibility of every American citizen who cares about free and fair enterprise, and a free and fair democracy, to reject companies that seek only short-term value for shareholders and offload the costs on the rest of us.
And, while we are at it, let’s appreciate the private and public sector leaders who helped us to get to this point. It’s clearer now, more than ever, that we have so much work yet to do – together.
Rob Lalka is the Albert R. Lepage Professor in Business at Tulane University.
