Thought Leadership Series #3

Co-authors:

David Blood, Senior Partner & Co-Founder,
Generation Investment Management LLP

James Cameron, Vice-Chairman and Co-Founder,
Climate Change Capital Ltd.

At a crossroads

Capitalism is at a crucial juncture

The sustainability challenges we face – the climate crisis, water scarcity, extreme poverty, shifting demographics – are unprecedented and require an urgent response. Failure to address these challenges will put at risk our ability to create prosperity in the long term. The current state of the global economy compounds these challenges; in fact, the financial crisis has only underscored our conviction that sustainability will be a critical driver of economic and industrial change over the next 25 years.

In the case of the climate crisis, significant capital needs to be mobilized towards low-carbon solutions that span sectors and borders. This mobilization poses a tall yet manageable order as ours is not a problem of capital, but one of capital flow. The global community has the money, the policy insights, and many of the technologies needed to modify our emissions trajectory.

Fundamentally, the challenge ahead is about capital reallocation and timing: How do we steer capital away from high-carbon investments and channel them towards the low-carbon economy? And, above all, how do we mobilize this capital at the pace required to avoid dangerous climate change?

In the face of converging financial and environmental crises, the context for business most certainly has changed. We can capitalize on an opportunity to lay the foundation for a sustainable future, both financially and environmentally. Businesses are seeking new strategies to adapt to a new landscape of risk and opportunity. Governments are facilitating investments in low-carbon infrastructure to boost jobs and economic growth. Unthinkable only a few years ago, today the case for a green recovery of the economy continues to gain traction around the world.

The stimulus package in the United States, for instance, incorporates provisions seeking to deploy capital toward low-carbon assets. The business community is lining up to call for a consistent price signal on carbon to help guide long-term investments. Around the world, governments have already allocated billions in fiscal stimulus to climate-related investments. These commitments are just the first installment in what could ultimately be a long-term government policy to use low-carbon growth as a key lever for economic recovery.¹

The financial industry is also adjusting to a new reality. Investors are recalibrating their risk and reward expectations; investment committees, boards of directors and shareholders are adjusting their concept of how to secure sustainable returns. Investors are finding longer-term horizons and investments in tangible low-emissions infrastructure more appealing than in past years.

There has never been a more appropriate time to return to fundamentals. Long-term investment strategies, in particular, will play a pivotal role in the transition to a low-carbon economy. So, how much capital will be needed to avoid dangerous climate change?