As most of you have probably read, Larry Fink, CEO of Blackrock, the world’s largest asset manager, went on the record a few weeks ago saying that investors ignore climate change risks at their peril. Blackrock will now be looking through the climate impact lens when making decisions for its investors. Not just as a negative screen, but to assess potential investment opportunities that address climate change. Jeremy Grantham, a famously contrarian investor (with an equally famous track record), went further and opined that institutional investors should offload fossil fuel energy stocks, because the potential increased returns – which he showed were historically minimal – do not justify the increased risk.
Two of the smartest investors managing gazillions of dollars are plainly stating that investment portfolios don’t need fossil fuel-based investments, and that climate change is not only a risk, but a potential opportunity for savvy investors. So what does that mean for carbon markets?
I’d like to say that a new dawn is coming and that carbon markets will reap the benefits of this wisdom soon, but I can’t. Larry and Jeremy are mostly talking about publicly traded investments – stocks and bonds. Largely, carbon markets operate outside that arena. I imagine (and hope) that pension fund, endowment and foundation investment staff are heeding this advice and looking at how climate change increases portfolio risk and consider being first movers in investments that address climate issues.
Carbon markets are, despite billions of dollars in annual transactions, a small fraction of the financial markets. And carbon offsets are a niche within carbon markets. The wave that Larry and Jeremy created won’t wash over the carbon offset markets soon. But the ripples could, by inspiring companies and universities to face climate risk head on. To that end, we’ve seen voluntary offset buyers increase dramatically. Voluntary offset markets have responded to this increasing demand by adopting new project types and novel approaches to financing. The Climate Trust is particularly excited about expanding its role developing new voluntary grassland projects and the work being done to create additional protocols aimed at regenerative agriculture and reduced fertilizer use. Climate Forward by Climate Action Reserve offers a way to monetize a portion of future carbon revenues in advance. Cool Effect is offering an easy to use platform to sell high quality offsets to retail customers.
The California compliance market’s success in standardizing science based, verifiable offsets should be celebrated. That market is also attracting more non-compliance buyers (i.e., investors) each year. These folks agree with us: carbon is underpriced. With investment gurus unequivocally stating that climate change should matter to investors, let’s hope that the ripples created by Messrs. Fink and Grantham continue toward carbon offset’s shores.