As our planet continues to experience the effects of rising temperatures across the globe, countries, and companies alike are acting to address climate change. In 2016, more than 190 countries came together to create the Paris Agreement, which aims to limit the increase in the average global temperature. Sustainable investing is on the rise around the world as a direct result of the Paris Agreement. More and more individual investors and investor groups are looking to put their funds towards companies whose goals align with the Paris Agreement. A common question we receive as a top ESG firm is how the Paris Agreement impacted sustainable investing. Let’s discuss more specifically how the Paris Agreement impacted sustainable investing.
What is the Paris Agreement?
The Paris Agreement is the first-ever universal, legally binding global climate change agreement. The agreement was adopted in 2015 by more than 190 countries. As part of the Paris Agreement, individual countries developed Nationally Determined Contributions (aka NDC) to reduce national emissions and mitigate the negative impacts of climate change. The United States officially re-committed to the Paris Agreement on January 20, 2021. The Paris Agreement has successfully been used in climate litigation forcing countries and an oil company to strengthen their climate action.
Paris Agreement Goals
The primary goal of the Paris Agreement is to avoid dangerous climate change by limiting global warming. Specifically, the goal is to limit global warming to well below two degrees Celsius, and pursue ways to limit it to 1.5 degrees Celsius. The primary cause of global warming is CO2 produced by burning fossil fields for electricity, heating, cooling, and transportation. Under the Paris Agreement, countries must determine, plan, and report regularly on their contributions.
The U.S. and the Paris Agreement
The U.S. has committed to an economy-wide target of reducing net greenhouse gas emissions to 50-52% below the emission levels of 2005. To reach this goal, the federal government is proposing advancements in carbon-free electricity, transportation, construction, agriculture, fisheries, and other industries.
The United States government also has committed funds to research and development dedicated to finding different ways to reduce carbon emissions and also funds the work of state and local governments to create jobs and grow local companies that are committed to net zero carbon emissions. In order to achieve net zero carbon emissions, a company needs to remove at least as much carbon from the atmosphere as it adds via greenhouse gas emissions.
Companies that release carbon dioxide, methane, and other greenhouse gasses as part of their manufacturing and production processes must find alternatives, like solar or wind power, in order to reduce their carbon footprint. However, these alternatives often cost more money. However, governments and private investors can provide the funds needed to help more companies make these green transitions.
The Paris Agreement has helped more companies realize that improving their ESG performance not only boosts the environment but also makes them better corporate citizens — and can help bolster their returns. As a result, many investors — from those planning for retirement to high-net-worth investors — are looking to give their money to companies that are aligned with the goals of the Paris Agreement.
How the Paris Agreement Impacted Sustainable Investing
The global economy transcends individual countries’ boundaries. Investing sustainably has a major influence on the business world and government. Investment leaders have the ability to transform the future of business and sustainability on a global scale.
Many pension funds are moving forward with ESG investing. Both individual and institutional investors have the opportunity to put pressure on companies to adopt sustainable policies and practices.
While investors themselves did not sign the Paris Agreement, there are plenty of incentives for investors to put their money in companies that align with the goals of the agreement. Some incentives include avoiding credit risk, enhancing reputation and credibility, meeting the needs and desires of clients and customers, and minimizing legal risk and the risk of regulation.
Many investor groups decide to align their funding with companies that have shown an actual commitment to the Paris Agreement. In fact, more than 110 asset managers and owners have joined the Paris Alignment Investment Initiative. The Paris Aligned Investment Initiative created the Net Zero Investment Framework, which lays out how individual investors and funds can overcome the challenges of sustainable investing.
Why Sustainable Investing is Important
It is clear that sustainability has a major influence on the business world. As a result of the Paris Agreement, many investors are looking for companies that prioritize the agreement’s goals and objectives. This includes ESG concerns. Environmental, social, and governance (ESG) risks and opportunities are the criteria from which a set of standards is created to allow socially conscious and sustainable investors to screen investments. Sustainable investing allows you to invest in not just green companies, but a variety of socially conscious initiatives. Investing sustainably allows companies to realize greater returns, develop a deeper relationship with their community and the earth, and contribute to a better world.
Are There Challenges to Paris Agreement-Aligned Investing?
There are multiple challenges associated with Paris-aligned investing, due to the always-changing and nuanced nature of climate change, and the varying social and environmental regulations in place across the world. This includes inconsistent approaches to fulfilling the goals of the Paris Agreement and inconsistent net zero promises across different industries.
If you want to avoid the challenges of Paris Agreement-aligned investing and make sure you are investing sustainably, it is best to partner with an experienced and knowledgeable sustainable investing firm like EGÉA SRI.
Sustainable Investing at EGÉA SRI
Here is the bottom line of how the Paris Agreement impacted sustainable investing: it made sustainable investing a lot more popular. Just like companies have learned that sustainable investing can be profitable, it can also be beneficial for your portfolio. If you are interested in beginning sustainable investing, come to EGÉA SRI. Our Chartered SRI Counselors can help you make a difference with your investments. We are the experts in sustainable portfolio management for clients like you. Open an account or book a free consultation today!
Disclosure:
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria exclude securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
