It is critical we address climate change, but there is no silver bullet solution. The landmark Intergovernmental Panel on Climate Change report released earlier this year stated that we have less than 11 years to reduce greenhouse gas emissions. This requires us to reduce emissions far more than the 7 percent fall we saw in 2020.
To achieve this change, we need to invest significantly in low-carbon infrastructure and technology in private markets across sectors, as well as continue to put pressure on larger companies to decarbonise.
There are increasing demands on listed companies to demonstrate their commitments to reducing their negative impacts on the environment. Many have stated ambitions to do more, but have mostly focused on carbon offsetting technology that is still to be developed.
While larger companies must play a significant part in tackling carbon emissions, they have well established business practices that may take too long to change. In contrast, smaller companies developing new infrastructure and technologies are more nimble and may be better able to drive progress by identifying and developing innovative climate solutions.
This area of the market requires substantial investment to scale solutions to help bigger businesses to decarbonise sooner. Smaller, private companies are also developing new technologies that can replace existing high-emitting industries, which is very attractive to investors.
Clients that want to allocate capital to sustainable investments often ask us about planting trees to provide carbon offsetting. However, the use of carbon offsets should be the final call, not the starting point. This is often an opportunity to educate investors about the fact that they need to diversify their approach by looking at the decarbonisation challenges faced by different sectors.
Agriculture must become more efficient; housing needs to be retrofitted with low-carbon technology; waste production should be reduced or seen as an energy resource; and our natural world must be protected and enhanced.
Investment strategies should aim to go far beyond carbon offsetting, and we are therefore steering investors towards areas to tackle urgent challenges around food production, waste management, energy storage and biodiversity.
For example, a private company, Waste Knot, reduces emissions from landfill by seeing waste as a product that can be used by other industries to replace fossil fuels. It diverts waste from landfill to produce energy pellets that can be utilised by steel and cement manufacturers instead of coal.
These types of exciting and impactful assets need to be rapidly scaled, largely through private investments, to make a notable contribution to the transition to a low-carbon economy.
Investor interest in infrastructure and private markets is steadily increasing, and a real shift in allocation is needed from institutional investors to drive change. As more pension schemes set net-zero ambitions and increasingly enhance their climate-related reporting, we expect interest to grow.
However, challenges remain for investors wanting to allocate to private, sustainable investments. The lack of sustainability reporting and measurement can be an obstacle for institutional investors, which are increasingly required to demonstrate they are taking tangible actions to contribute to the transition to a low-carbon economy.
Infrastructure and private markets are improving their disclosures to demonstrate their value. Management teams are recognising the importance of reporting their firm’s contribution to sustainability, including fighting climate change, to successfully secure capital to grow.
However, investors do not need to wait for perfect disclosures to take action – we don’t have the time. Instead, they can seek infrastructure and other private market opportunities with the greatest potential to tackle emissions and accelerate progress towards a more sustainable future.