The biggest growth opportunity in finance is climate-aligned investment and innovation.

In 2018, all major asset classes struggled to earn. Cash was the asset class that expanded the most, signaling a pull-back from new investment and a wait-and-see attitude. In 2019, trade tensions spurred worries of a global economic slowdown that could lead to recession. Stock prices hit record highs in a volatile year, even as cash holdings remained exorbitantly high.

Between 2011 and the end of 2018, commitments of future funding to climate-smart priorities by major financial institutions across five sectors amounted to $3.56 trillion, with those commitments extending out to 2030. In 2019, that aggregate of climate-smart finance commitments expanded by 71%, to $6.08 trillion. (That 0.08 represents $80 billion.)

There is no segment of the global investment market that is experiencing such an overwhelming commitment of new dedicated investment. The key questions are:

  1. How do we determine what qualifies as “climate-smart” or “climate aligned”?
  2. How heavily contingent are these commitments?
  3. What needs to happen to get this money flowing to real-world activity?

Resilience Intel is shifting, in 2020, to a focus on development of new financial instruments and blended finance strategies, and an emphasis on climate-smart asset-building. The Resilience Intel system is developing through the following ongoing initiatives:

  1. Aggregation of climate-smart finance commitments;
  2. Mapping of science insights to financial data;
  3. Developing of financial instruments and blended finance strategies;
  4. Climate-smart asset-building guidance and transparency.

The ultimate goal is a shift of 100% of mainstream finance in the public and private sectors to climate-smart standards and practices.

Investors are rapidly shifting focus to sustainable value added.

Major investors are making bold moves to align their portfolios with sustainable investment priorities.

  • During the COP25 climate negotiations in Madrid, the largest ever group of institutional investors—631 institutional investors managing more than $37 trillion in assets—urged governments to step up ambition to tackle global climate crisis.
  • Goldman Sachs announced a $750 billion clean finance commitment in December, including $600 billion in new commitments.
  • BlackRock announced in January it would adopt sustainability as its new strategy for investment going forward, with new metrics and a new commitment to divest from fossil fuels and invest in climate-aligned enterprise and innovation.
  • One of the most visible market analysts in the US is telling his audience “oil and gas stocks [are] like a slowly melting ice cube, a wasting asset that will have down revenues unless oil jumps higher and stays higher”.

The rapidly evolving landscape of major investor interest in climate-aligned priorities is timely, given escalating concern markets are not ready to handle converging, compounding global risks.

Climate-smart investments in energy, as in other sectors, will not follow the old industrial market paradigm, where big, heavy, centralized operations are the easiest to finance and help hold the prevailing market share. They will instead tend toward lightness, decentralization, intelligent integration, and empowerment of end users.

This will create new modes of scalability, each bringing new opportunity for return on investment, by adding sustainable efficiencies and adding more consumers, while avoiding the depletion of natural capital.

Food system risk and resilience will shape opportunity.

In a report on food system transformation, the World Economic Forum found some major costs and risks from unsustainable practices, along with corresponding opportunities for achieving new investment efficiencies. The report found that:

  • 95% of the world’s land will be degraded by 2050, if we continue current unsustainable practices.
  • Food loss and waste cost the global economy $936 billion annually and account for 8% of planet-warming greenhouse gases.
  • Food systems cost $12 trillion dollars in health, economic and environmental costs – 20% more than their market value.
  • Achieving sustainability across 100% of the food system, including public health, could free up more than $2 trillion per year.

Food system transformation will be driven also by decisions about policy, infrastructure, development incentives, and investment, at the city level. As the global population becomes more urbanized, and more people are detached from food production practices, the success of sustainable urban planning to drive food system transformation will create new business opportunities at all scales.

Smart adaptation investment builds resilience and expands opportunity.

The Global Commission on Adaptation released a flagship report in September, outlining the stakes for success or failure in the funding of climate adaptation measures. The viability of the mainstream economy, at all scales, as well as the hope of achieving the Sustainable Development Goals or Paris Agreement targets, will be shaped by the successful deployment of adaptation and resilience investment.

The report finds $7.1 trillion in net benefits to be achieved by successful investment in adaptation across five major areas:

  • Strengthening early warning systems
  • Making new infrastructure resilient
  • Improving dry land agriculture crop production
  • Protecting mangroves
  • Making water resources management more resilient

The effort to adapt our world is not merely about adjusting to climate impacts or mitigating their cost; it is an effort to adapt all systems to the higher standard of climate-smart investment, innovation, and value creation. Wherever we succeed in making these critical adjustments, we unlock more value for the benefit of human wellbeing; where we fail, we create conditions for steady economic decline and collapse of institutions.

All the money in the world is, to some extent, at stake.

The climate-smart finance aggregation figures reported here were produced by the Resilience Intel team, with extensive background research by Resilience Intelligence Fellow Shantanu Agrawal.