Investing in the future

• Published date: 06 November 2021
• Publication title: Mix, The

Sustainable Finance has grown in importance in the past few years. One manifestation of that is the Climate and Energy Finance Group (CEF), housed in the University of Otago’s Business School — a group of researchers and teachers in the area of sustainable finance.

It’s an area most people won’t know much about yet, neither what sustainable finance really means nor the transition of our financial system towards incorporating sustainability.

To me, what sustainable finance describes, essentially, is incorporating the risks, opportunities and impacts from and to environmental and social issues into our financial system, its policies and how we make financial decisions.

Most of the focus in the emerging sustainable finance trend so far has been on the environmental risks, particularly the future impacts that we face as a result of climate change. These risks are often broken into three categories: i) Physical risks, such as increased flooding, fires, droughts etc; ii) transition risks, such as fossil fuel power plants being replaced by cheaper renewable alternatives or government policies that render such assets unusable; iii) liability risks, from insurance claims and climate change litigation.

These risks also present a huge opportunity for innovation and new ways of investing. The annual investment needed to transition and adapt our global economy has been estimated at between $US1trillion and $US6trillion invested, per year.

I would argue that since the Paris agreement was signed, investors have been changing how they invest to avoid unnecessary risk, take advantage of the opportunities and meet investor demand for more conscionable investments. For example, in New Zealand, according to the Responsible Investment Association of Australasia, responsible investments grew from $111billion to $142billion between 2019 and 2020, now making up 43% of our country’s professionally managed assets. This trend can be seen globally, as almost half of assets under management now have at least some form of environmental, social and governance (ESG) policy within their investment decisions.

Policy makers globally and domestically have also enacted new sustainable and particularly climate finance policies.

One type of policy that has become quite popular globally is to create a price on emissions through either a carbon tax or an emissions trading scheme (ETS). New Zealand initiated the world’s second ETS, after the European Union, more than 10 years ago and has been...