Africa: How Investment Funds Can Drive the Green Transition
The transition to net-zero greenhouse gas emissions requires unprecedented change by companies and governments, as well as additional investment of as much as $20 trillion over the next two decades. Strong fiscal policies, complemented by a broad range of regulatory and financial policies, will be necessary to facilitate the green transition.
The world's $50 trillion investment fund industry, especially funds with a sustainability focus, can play an important role financing the transition to a greener economy and helping to avoid some of the most perilous effects of climate change, according to our recent analysis as part of the IMF's Global Financial Stability Report.
Net flows into sustainable funds increased notably in 2020.
Sustainable funds differ from conventional funds because they have a sustainability objective while also seeking financial returns. Within this broad class of funds, some funds are more narrowly focused on the environment, and a further subcategory is concerned with climate change mitigation specifically.
Climate stewardship and firm financing
The positive role of funds comes directly from their ability to influence the corporate sector. Through stewardship, which includes direct engagement with firms and proxy voting, funds can effect changes in firms' sustainability practices. For example, earlier this year, activist investors stunned the investment and energy industries by winning seats on Exxon Mobil's board as part of their bid to change its climate strategy.
The latest Global Financial Stability Report shows how investment funds have stepped up proxy voting behavior with firms on climate-related matters. Conventional investment funds voted in favor of almost 50 percent of climate-related shareholder resolutions in 2020, up from about 20 percent in 2015. Funds with a sustainability focus had an even stronger track record, voting in favor of about 60 percent of such resolutions, and even close to 70 percent in the case of environment-themed funds.
Moreover, the growing popularity of investing in sustainable funds means more capital available to firms with a high sustainability rating, boosting firms' bonds and shares issuance.
Still too small
However, even though sustainability is becoming mainstream in investment strategies, sustainable investment funds still represent only a small fraction of the investment fund universe. At the end of 2020, funds with a sustainability label totaled about $3.6 trillion, representing only 7 percent of the overall investment fund sector. Funds with a specific climate focus accounted for a meager $130 billion of that total... Read more on All Africa
Source: All Africa