Fighting fires with finance: how investment professionals can help tackle the climate emergency

Record temperatures. Fires in Canada that covered New York in a dystopian haze. Floods that left one-third of Pakistan underwater. Sea ice levels at an all-time low. You don’t have to look far to find evidence that the climate emergency is getting rapidly worse.

As the reality of the climate crisis has become increasingly impossible to ignore, the world of finance has woken up to the huge financial risks it poses. These include the devastating effects of a warming planet, the regulatory and political impact of the global transition to a low-carbon economy, and the reputational risk of being a laggard in the eyes of eco-conscious consumers.

Another key driver is the growing pressure from businesses on their suppliers in an effort to reduce the greenhouse gas emissions along their entire supply chain. Likewise there is pressure from investors and lenders: companies and organisations that are more heedful and proactive on climate issues are often viewed as more futureproof and lower risk when it comes to insurance and the ability to attract capital – and also better placed for any future regulations and legislation.

As well as trying to mitigate these myriad climate risks, investors have also become more attuned to the positive role the financial sector can play in supporting the net zero transition and funding the global shift to cleaner energy. After all, fighting rising global temperatures is in some respects a global effort to reallocate financial resources. The financial industry, therefore, sits at the heart of a complex web of powerful push and pull factors for taking climate action. Which means a career in finance can be an impactful option for those seeking to devote their working lives to tackling the climate crisis.

“We’ve got a younger generation that is more purpose driven and they’re the ones coming into finance,” says Chris Fidler, head of industry codes and standards at CFA Institute, which provides the CFA Program, the industry qualification regarded as its gold standard. “They want to make a difference and, every year, there are more people in the industry that are cognisant of these ethical- or values-based decisions.”

A case in point is Justin Kew, who completed the CFA Program and now works as an ESG analyst at an asset management firm in London. ESG refers to investment strategies that explicitly take environmental, social and governance factors into account, as well as more narrow financial measures, such as profits and revenues.

“You start to discover there are market inefficiencies that people have overlooked, and that really got me interested,” says Kew, who began specialising in ESG about 10 years ago. “There is real world change you can help to put in place, and you start to think about companies from a different perspective.”

ESG investing has grown dramatically in recent years. Bloomberg Intelligence has estimated that global ESG investment could hit $50tn (£39tn) in 2025, triple the amount in 2014.

However, the rapid adoption of climate-related financial factors means there is much scope for confusion, error and misrepresentation. Definitions vary, as do methodologies for calculating the scope of a company’s carbon emissions, and other ESG metrics and ratings. This means the world of ESG finance has all too often been beset by instances of greenwashing, both in terms of the intentional misstating of sustainability credentials and also inadvertent misrepresentations.

Fidler notes that the industry is still working out best practice. “There’s still so much to be figured out on that front – it’s almost like learning a new language.” One key focus for CFA Institute is setting standards so that investment professionals can communicate with trusted terminology. “For example, we’re doing a collaboration with PRI and the Global Sustainable Investment Alliance to harmonise and clarify our definitions of certain terms,” says Fidler.

Finance may be essential to the fight against the climate crisis, but it needs to be done properly to be both credible and impactful. Industry professionals need to be equipped with the skills and expertise to understand ESG in order to fully implement it, keep pace with developments, and adhere to increasingly rigorous auditing frameworks. For instance, from next year companies will have to meet the EU’s Corporate Sustainability Reporting Directive, while the Sustainability Accounting Standards Board is working to standardise ESG accounting practices to help make comparisons easier when assessing corporate progress and vulnerability to risk – in much the same way that financial accounting became standardised during the 1980s.

Fidler explains that often the key to assessing climate-related financial factors – for both investment clients and other stakeholders – is the right information. “One of my main projects has been to develop the Global ESG Disclosure Standards for Investment Products. Those are the standards for the information that managers should disclose about how ESG factors are incorporated into a funds or strategy’s objectives, investment strategies or stewardship activities,” he says.

Clear communication is also key – especially in an industry where complex terms and acronyms have all too often been used to obscure their meaning or purpose. “There is confusion on the terminology,” says Kew. “For example, people should not say things like: ‘Is there an ESG stock’ – that does not exist. ESG is about how a company manages their employees, their environmental impact and their governance. Analysts who regularly do research as part of their role should not need to upskill on ESG factors specifically as they encounter them every day. It’s about becoming more systematic in their application and having a better understanding of how ESG affects prices of securities like stocks or bonds, which will become easier as the confusion clears.”

Often ESG issues can be very complex, not least because environmental initiatives can intersect or even conflict with social factors. Electric cars, for instance, depend on controversial cobalt mining for lithium batteries. Meanwhile, companies that proactively try to improve their emissions monitoring might find that their reported emissions rise as a result, not because they’ve become more polluting but simply because they’ve become better at measuring.

Nick Bartlett, senior head, learning content at CFA Institute, says that navigating these issues is another key area where his organisation can play a guiding role and help students better assess climate-related financial factors. “When developing our syllabuses, we focus on inputs from panels of practitioners directly involved in the relevant parts of the investment process. With curricula, where there is subjectivity in areas relating to environmental considerations, we include a scientific review within the development process to assess accuracy,” he says.”

The climate crisis is also intersecting with finance in other ways – for instance, the growth of the green bond market, and the evolution of investment products and services to meet client needs and demand. “We are seeing a lot more focus on private assets,” says Bartlett.

He notes that the rapidly evolving landscape for climate finance makes an expert professional qualification all the more useful, such as the CFA Institute Certificate in ESG Investing, which offers practical application and technical knowledge in the field, all the more valuable. “We are educating candidates on how practitioners are integrating ESG considerations into their investment analysis and portfolio construction process.”

The CFA Program provides expertise and real-world skills in ESG investment analysis, preparing candidates for successful careers as investment professionals. If you’re interested in a career in finance visit cfainstitute.org/en/programs