Markets can’t fix climate change on their own

Posted by Robin Powell on November 1, 2021

Markets can’t fix climate change on their own



The world has procrastinated for so long on climate change that we’re now at “one minute to midnight”. That’s the stark warning from British Prime Minister Boris Johnson as world leaders assemble in Glasgow for the landmark conference COP26. We all have a responsibility to help combat global warming, and that includes investing in a sustainable way. However, there is a limit to what the “invisible hand” of the capital markets can achieve. Ultimately, it’s governments that need to take the lead — and the time for action is now. 


Few would argue that one of the biggest trends in asset management in the past five years has been the significant increase in sustainable investment solutions amid a global public awakening about the scale of the climate crisis.

The numbers are eye-watering. A recent report by the Global Sustainable Investment Alliance (GSIA), a grouping of international responsible investment associations, found assets under management in sustainable investments have grown 15% in two years to $US35.3 trillion.

From once being a fringe concern, sustainable investment now holds centre stage in the industry. The GSIA study found total sustainable investment assets made up nearly 36% of all professionally managed assets in 2020, up from a little over 33% two years before.


What changes?

Yet for all the popularity of sustainable investment — a trend driven in part by a sense that doing well financially and doing well environmentally need not be incompatible — questions are also being asked about whether there is any meaningful impact on climate change.

After all, divestment on its own does not change the fossil-fuel equation. Funds that lessen their exposure to large greenhouse gas emitters do so largely in the secondary market. On the other side of the same trades are buyers who see value in those companies.

In other words, investors who embrace sustainable portfolios may not really be doing much to stop all that coal, gas and oil being mined and burnt. Low emissions exposure in your portfolio does not necessarily translate to low emissions in the real world.

None of this is to knock the goodwill of the many millions of people who want to invest in a way that is consistent with their beliefs about protecting the planet for coming generations. But as Kenneth Pucker, a senior lecturer from Tufts University, put it in a recent essay for Institutional Investor, there is a disconnect between the growth of sustainable investing and the reality.

“Investors are finally taking ESG investment seriously,” Pucker wrote. “But as currently practised, most ESG investing delivers little to no social or environmental impact. The planet has just experienced the warmest two decades on record, Antarctica has been melting, US income inequality has been gapping, and species have been disappearing at rates unseen for millennia. And the Dow Jones Industrial Average is hitting new highs and asset managers are collecting attractive fees to oversee a popular new investment category.”


Where are governments?

The need for a reality check on ESG is also highlighted in a new industry research report, Can Capital Markets Save the Planet? a joint effort by KPMG International, CREATE-Research and the Chartered Alternative Investment Analyst (CAIA) Association.

The report is based on in-depth discussions with CEOs, CIOs and senior investment strategists from a cross-section of 90 endowments, pension plans, long-only asset managers and alternative asset managers across 20 jurisdictions, including the G7 economies, Hong Kong, Scandinavia, Australia and New Zealand. The research sample encompassed $US34.5 trillion in assets under management. 

Among the report’s key findings is not only the well-known short-term focus of capital markets, but the failure of governments globally to incorporate the costs of carbon pollution into corporate balance sheets or to reform accounting standards to better reflect the risks.

Look at it this way. It is now 16 years since the Kyoto Protocol became international law. This put the onus on governments to introduce carbon pricing, either by levying a direct tax on its consumption or adopting so-called ‘cap and trade’ emissions trading systems. Yet to date, only 22% of global emissions are currently subject to a carbon pricing scheme.

“The invisible hand of markets needs to be matched by the visible boot of governments,” the KPMG report says. “So far, a green portfolio does not equate to a green planet. There is currently no clear line of sight between climate investing and its impacts.”

So while there may be enormous goodwill among global asset managers and their clients, the private sector will be unable to effectively lead change without direction from the public sector. 

As to why governments have been so slow to act, the report notes that politicians are incentivised to “kick the climate issue into the long grass”.

“No matter how enlightened their climate measures are, opposition parties have often treated them as an attack on the livelihoods of working people.”

These concerns have been most evident in coal-producing countries like Australia, which has burned through half a dozen prime ministers in the past decade and a half as the country has sought and failed repeatedly to manage an effective transition from fossil fuels.


COP26: the stakes get higher

All of this raises the stakes for governments and regulators coming out of the COP26 meeting in Glasgow, the latest and highest-stake climate conference.

“Market failures and market inefficiencies have arisen owing to a slower policy response on climate issues, while the prevailing ecosystem of capital markets remains overwhelmingly centred on short-term financial goals, irrespective of the damage they may inflict on wider society,” the KPMG report concludes. 

“To correct that, governments, regulators and market respondents are on a steep learning curve as they advance on a climate change journey.”


Grounds for hope

According to Tufts University’s Pucker, the world is now in Act IV of a five-act kabuki play in which investors and others slowly recognise that ESG investing, as currently practised, will not likely lead to financial outperformance and is mostly unconcerned with planetary impact.

But there is hope. The final act, he says, will involve a reawakening to the opportunities (and limits) of investing to address growing social and environmental challenges.

For example, pressure from investors and citizens has led more than 1,000 companies to commit to science-based targets on emissions. As well, the prices of renewable energy and batteries continue to fall, and capital is flowing to new technologies that aid in the transition.

Governance remains a real force for change, as seen most vividly recently in the against-the-odds board challenge against oil giant Exxon Mobil by a small San Francisco-based wealth management firm Engine No.1.

Finally, efforts are underway to establish more rigorous benchmarking for ESG, grounded in science-based targets. This should boost transparency and help stamp out greenwashing, in which the sustainability claims of companies are based more on marketing than substance.

“The private sector will have to be an increasingly active and authentic partner to address building social and environmental challenges,” Pucker says. “However, governments and policy must lead.”

Can capital markets change the world? The answer seems to be that they can do a lot, but only if they have the right price signals. And that starts with effective rule-setting by governments.

COP26 provides the politicians with one last chance to get their act together.



For more information on COP26, visit the official website:

UN Climate Change Conference UK 2021 (Cop26)



How does carbon risk impact on fund returns?

Helping a “lost” generation to invest

Are we living in the 1970s all over again?


© The Evidence-Based Investor MMXXI


Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.


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