Show Me The Money
Updated: May 21, 2021
Hi everyone - this week, I want to dive into a recent headline that caught my eye. It's fascinating and important, but in order to give you the full scope, we're going to have to zoom out to a 30,000 -foot level so we can get the big picture first. Hang with me and I promise it will be worth your while.
As we've talked about many times, there are no "silver bullets" when it comes to addressing climate change and remedying environmental damage. Instead, the challenge of living more realistically within the bounds of our physical environment requires input from many sides:
farmers and cooks;
mountain bikers and car campers;
factory operators and deep-sea fishers;
engineers, lawyers, doctors, designers; the MTA.
Addressing climate change requires both biologists and bankers.
Wait - bankers?
What, you may ask, does a shiny-shoed banker have to add to the climate conversation? Quite a lot, as it turns out.
A Briefer on The Fundamentals of Modern Civilization
Being a Thoroughly Modern Millie yourself, you might know a thing or two about how the world works, so I won't belabor the point. Suffice to say this: in the modern world, you need money to do things. And the bigger the thing you want to do, the more money you'll need. Buying an all-electric vehicle is one thing; but if the "thing you want to do" is to overhaul an entire country's power grid or transition an industry from archaic tech to green tech, you're going to need money. A lot of it. In 2018, the OECD estimated that about $6.9 trillion a year is required up to 2030 in order to meet the objectives of the Paris Agreement.
And that is where bankers come into play. If you aren't a banker yourself, or aren't related to one, you might not know what these folks do, aside from periodically screwing up the global economy (a story for a different time, but they're not all bad guys). In a nutshell, bankers help move money around from the people that have it to the people that need it. They help convince investors to lend their money to a variety of projects, with the expectation that once those projects get off the ground, the investor will see a return on that investment. Banks also make loans to businesses large and small, enabling them to develop products and expand their operations.
Getting That Green
So if you need money to start and grow a business, you need to have a banker's (and thus, an investor's) attention. In the past, that translated to maximizing a return. Luckily, in recent decades the banks' scope of attention has been widening, from a 'shareholders first' perspective to a broader 'stakeholders together' perspective. This broader perspective has led to an explosion of interest in 'impact investing' (if you want a comprehensive history, read this). Impact investing is a fascinating world that we'll talk about later, and I encourage you to read up on it.
In addition to more beneficial investments, though, some banks have also employed a 'negative screen' to weed out those investment opportunities that they do not want to engage with. Which brings us to the article of today.
No Euros for You
Earlier this month, the European Investment Bank (EIB) announced that it would be ending all investment in fossil fuels by 2021 (link here).
The EIB functions like a development bank for the European Union. It provides funding for massive infrastructure projects like the Chunnel, for energy projects, and for small- to mid-size business investments throughout the Union. Hundreds of billions of euros flow in and out of the EIB every month, helping to ensure Europe's continued stability and success. And two years from now, those many billions of euros will stop flowing to fossil fuel projects.
The decision brings the European Union closer to its goal of achieving carbon-neutrality by 2050, and signals a shift in the financial world. This new rule means that within the E.U., the many fossil fuel-reliant businesses that rely on this funding are now evaluating their options:
Do I stay in the European market?
Do I transform my operating and delivery model to 'green' energy?
Can I afford to stay in business?
On paper, these are short questions. But they will have massive ripple effects in the European economy. The incentives have been changed, and businesses will have to adapt to these new demands if they want to secure the funding they need. It will enable the growth of those companies that are pursuing green tech within the E.U. Many also wonder whether this will put additional pressure on private banks to limit funding and investment in fossil-fuel dependent companies.
In the movement to address climate change, there is understandably a lot of rage and protest directed at the old guard of banks, manufacturers, and retailers. Much of this is warranted; much of it needs to be overhauled. But these institutions exist for a reason, and they serve a vital purpose in our society - scrapping them entirely doesn't make sense. Decisions like this from the EIB, and other efforts like social impact investing and public-private partnerships, show us the powerful effect that these institutions can have when they decide to put a foot down and do things differently.
As financial institutions yield to growing demand for 'green' investment options, we can expect to see a top-down shift in how our economy operates - all by re-directing funding towards efforts that can move us towards environmental health, rather than undermining it. There's a tremendous amount of work that follows decisions like these, and many unanswered questions. But for the EIB, the first step has been taken; the line has been drawn. And that's something to be excited about, friends!
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