The IPCC Summary Report on Climate Change: what does it mean for impact investors?

Think of this moment like that classic scene in “Casablanca” where Humphrey Bogart is forcing Lauren Bacall onto the plane fleeing Morocco, and he says: “If you don’t get on that plane, you’re gonna regret it. Maybe not today. And maybe not tomorrow. But soon… and for the rest of your life.”

For the past several years, I’ve used a simple decision tree to help deconstruct the complicated political and emotional matrix surrounding climate change and what we might/could/should do about it. Here it is for anyone who is a visual learner:

Climate Change Decision Tree

Why am I writing about climate change? This is an impact investing blog, not an Earth Science journal. I do so because a few weeks ago the United Nations Intergovernmental Panel on Climate Change (IPCC) published the first of three volumes of its Fifth Assessment Report (AR5). While the authors failed to consult me before releasing it, they conveniently answered the first three levels of my decision tree: climate change is happening; its effects are measurable and not linked to geological cyclicality, and it is being exacerbated, if not directly caused, by human activity.

As one might expect, controversy instantly flared. Some rushed to embrace AR5 while others rushed to discredit the science and question the motives behind it. Entire governments (think Bangladesh vs. China) found themselves on opposite sides of the divide. But if nothing else, the reaction to the report confirms one thing: the issue of anthropogenic (human-caused) climate change remains intensely divisive for governments and business, and intensely emotive for individuals. Put very simply, the divide splits those who believe that climate change poses a threat to human life on earth from those who hold that global warming is a hoax, a conspiracy or shoddy science.

It is reasonable to presume that most of the readers of this blog would place themselves squarely in the first camp. Many impact investors already pursue some form of climate theme in their portfolios: de-carbonizing their equity allocations; seeking opportunity in clean technology; financing alternative/renewable energy generation; deploying capital towards forest stewardship and land use; investing in water and waste; etc. As such, the IPCC report may simply provide confirmation and support for existing strategies, and I don’t expect to see an immediate shift in the way impact investors approach deploying capital for climate change.

But what I think will change is the attitude of government, big business and international public opinion. And, as a result, the attitude of the global capital markets must also change. Think of this moment like that classic scene in “Casablanca” where Humphrey Bogart is forcing Lauren Bacall onto the plane fleeing Morocco, and he says: “If you don’t get on that plane, you’re gonna regret it. Maybe not today. And maybe not tomorrow. But soon… and for the rest of your life.”

If my conclusion is right, we’ll all need to think about the various forces and themes that will likely inform our impact investing strategies over the coming years. Here are a few that come to mind, but this is most certainly not a complete list:

  • The UN Climate Change Convention is going to be held next week, which will draw up new carbon emission standards, replacing the one that was negotiated in 1994. If you don’t think the world’s knowledge of climate change has evolved since 1994, you haven’t been paying attention. Regardless of the specifics, there will be a new legal framework guiding global climate change policy in 2015. Be prepared.
  • Governments are, largely, broke. There will be precious little money available to spend on anything that is not either mandated by law or won’t have measurable effects in time for the next voting cycle. As such, expect a lot more public-private partnerships in sectors like cleantech and utility-scale clean energy. Solutions, leadership, and partnerships will come from the private sector, supported by government policy in the form of tax incentives, regulatory benefits, and favorable policy change.
  • Climate change requires innovation. Innovation requires experimentation. Experimentation results in failure. Failure requires risk capital (and by this, I mean “100% loss of capital” type risk). Expect a LOT of failure and for a LOT of money to be lost. Markets punish losers. But…
  • Innovation also results in the winners being rewarded by the market. Huge fortunes will be made in the coming decade as our global economy adjusts to the reality of climate change. And innovation is already happening. Let’s not forget that the country which rejected Kyoto is one of the leading forces behind resource-efficiency technology.
  • A growing awareness of, and desire for, “sustainability best practices” among global and local businesses will drive services and products that support these trends. While the B2B sustainability eco-system is growing, I can smell a massive opportunity as companies re-tool to meet a new regulatory environment. Small, nimble companies are already exploiting this shift as a way to build consumer loyalty and mitigate future risk. And some massive companies – General Electric, Walmart, ExxonMobile come to mind – are making climate-change investments part of their growth strategy. “Greenwashing” or “mainstreaming”? Regardless, it reflects a shift that will eventually be reflected in the market.

While the IPCC report will be preaching to the choir of impact investors, it will also introduce an element of credibility for mainstream conventional investors who will be comforted by impact investing’s combination of a pragmatic approach to finance and committed approach to social and/or environmental value. This will, in turn, catalyze the institutional-scale capital necessary to finance the gradual conversion of our energy complex.

If we, as impact investors don’t get on that plane, we’ll regret it.

And, just in case you are one of those visual learners I referenced at the beginning of this blog, I’ve lifted this image from the IPCC report. If it doesn’t get your attention, you either live somewhere near Iceland (the only blue spot on the map) or you are such a climate-change skeptic that nothing will do so…