Giving Compass' Take:

• Aniket Shah provides a framework for impact investors who want to be involved in profitable sustainable investing. 

• How does this assessment align, or not, with your own impact investing strategy? Is it time to adjust your strategy? 

• Learn about building an impact investing strategy. 

I’ve advised governments and financial institutions on how they should think about the allocation of capital to the best businesses, and I boil it down to five points:

  • Investors need to understand that there’s a quiet revolution happening in sustainable finance. It’s new data. It’s new risk tools. It’s new measurement. It’s new disclosure policies. It’s been happening for a while, and it’s now taking off.
  • Investors need to understand the risks that are involved with a two, potentially three or four degree Celsius climate change scenario, and there are risks that are very direct, i.e. stranded assets. If we actually take two degrees Celsius seriously, it means that trillions of dollars of market cap value for large oil and gas companies, for example, actually shouldn’t exist because their assets will have to stay underground. They’re stranded. Coastal real estate is a risk. Political upheaval is a risk. If you go to Saudi Arabia or Nigeria or Venezuela or Russia or the United States, large oil, fossil fuel producers, what does your economy look like in 50 years if you can’t actually go and use carbon assets?
  • This transition means opportunities: new businesses, new business models. It means old businesses looking at the world a little differently. It means old technological companies looking at the world differently as well as new technological companies engaging with the world. An investor should be thinking, how am I going to allocate capital profitably?
  • This a global transition. You actually have to think about geography when you think about sustainability because there are certain parts of the world that are in the lead. And there are certain parts of the world that are going be hit the hardest from climate events. Sadly, the African continent that contributed the least to climate change will actually bear the largest brunt of it. So having a global perspective and thinking about the nuance of geography will matter a lot.
  • You shouldn’t be a purist when it comes to climate change or sustainability when you’re allocating capital because there is a lot of nuance in this space. It could very well be the fact that large oil and gas companies become the leaders of the renewable energy transition. I’m a believer, personally, that it’s more about engagement, that you should invest in these companies because they’re large parts of the economy. They’re how the energy system of the world operates today. You should ask Exxon, Chevron, Shell—what are you all doing to stay at two degrees Celsius? What is your plan? How are you contributing? That is a much more useful and thoughtful and I think, productive way that an allocator of capital should be operating as opposed to just divesting and letting somebody else deal with it.

I think there are investors who are engaged in this space who are figuring these things out every single day.

Read the full article about sustainable investing by Aniket Shah at TriplePundit.