Between a rock and hard cash: Why investments can be part of a climate activist’s toolkit

Calvin Trottier-Chi 🛠️

One of CNBC’s most infamous money management tips was to donate 7% of your income. This stat was quickly and almost universally panned for being out-of-touch. But we disregard it at our own detriment.

For starters, CNBC actually meant to praise a particularly charitable individual, not exemplify him. In reality, just 0.5% of aggregate income in Canada is donated. This isn’t enough, not when Canadian food banks are receiving record-breaking spikes in visits. It’s also outdone by the United States, where 1.03% of aggregate income gets donated. But there’s a limit to what individuals are willing to give away, especially in a cost of living crisis.

What popular discourse also misses is that you can still do good with the dollars you don’t donate. Sustainability is a growing, multi-trillion-dollar, investable market—in 2024 clean energy generation, technologies, and infrastructure raised $2 trillion USD in investments worldwide, double the $1 trillion USD invested into fossil fuels. This is nearing, but not quite reaching, the lower-end of the $3 to $12 trillion USD needed per year to combat climate change. 

Raising $3 to $12 trillion USD is an amount beyond donations and public dollars. But it’s solidly within the realm of possibility for financial markets. After all, the total global market is worth over $200 trillion USD. To keep the momentum going, climate activists will have to transition too, from demonstrations and donations to dividends.

Greasing the wheels of profit

Every sustainable finance practitioner will eventually hear the phrase “climate-related risks and opportunities”. This is simply putting sustainability in the language investors understand: “risks” and “opportunities”. The world needs to be in sync on understanding what climate-related risks and opportunities mean, because otherwise financial markets won’t be able to function. Even a question as fundamental as “What are a company’s emissions” required years of work from multiple international organizations to standardize (to see how their standards turned out, read IFRS S2 Climate-related Disclosures). 

Historically, most of the emphasis has been on the risks, such as the risk that a company falls behind its competitors on emissions or that it gets disrupted by environmental damage. More recently, as clean energy technologies have grown more popular, there has been more attention towards the opportunities, such as a company making wind turbines out of low-carbon steel. 

To process this information, investors use an approach called ESG (environmental, social, and governance) investing. There are many ways to do ESG investing, but it basically all boils down to considering sustainability when making investment decisions. For example, through ESG investing, an investor might determine that high emissions in a company’s value chain bodes poorly for its future financial performance. Conversely, an investor could determine that a different company’s knowledge of low-carbon building materials will eventually give it highly prized access to markets.

Merging the fields of sustainability and investment doesn’t come naturally, though. When making investment decisions, ESG investing stops short of holding sustainability equivalent to, let alone prioritizing it over, financial returns. As a result, ESG investing puts a big focus on tech companies like Microsoft and financial companies like Paychex Inc, which don’t pose direct risks to sustainability but don’t really contribute to meeting $3 to $12 trillion USD of climate action either.

To be fair, investors’ hands are somewhat tied—our $200 trillion USD global market is fuelled by people’s pensions and savings accounts, and any deviations from maximizing profit must be meticulously justified. As a consequence, getting sustainable finance flowing properly means government has to step in or people have to step up.

Government is, of course, no stranger to stepping in to uphold the public interest. Through policy intervention, it can make sustainability relevant or “material” to investors by adding financial stakes. In recent years, governments have made climate-related risks material by putting a price on emissions. They’ve also made climate-related opportunities material by providing clean technology tax credits and financing on more generous terms than can be found from other investors. When a climate-related risk or opportunity is made material, investors will start weighing it in investment decisions accordingly.

However, continued policy support is uncertain. In the United States, over the past two years, there has been six times as much anti-ESG legislation restricting sustainability considerations in investment decisions as there has been pro-ESG legislation requiring it. Within this, a particular heavyweight was a new Texas law restricting government from doing business with investors “boycotting” fossil fuels—and in this instance, “boycotting” broadly includes investors currently invested in fossil fuels but planning to eventually transition away. Also over the past two years, the Biden administration kickstarted green industrialization in America (and abroad) through the Inflation Reduction Act, which incentivized half a trillion of investments into clean technologies and infrastructure. Yet, although 85% of the investments have gone to Republican congressional districts, the Trump administration has signalled that it intends to repeal the Act.

Thus the people may have to step up. With enough divestment away from sustainability risks and enough investments into sustainability opportunities, everyday people could steer financial markets towards more climate action. 

In a way, giving people a bigger voice in financial affairs is a natural evolution. Companies are already starting to report more societally relevant information, like their sustainability risks and opportunities. There is also a growing legal obligation for investors to use that information, such as with Canada’s expansion of fiduciary duty and the European Union’s expansion of materiality. The people, meanwhile, have shown a growing propensity for making their wants known. Amidst the flurry of activity around GameStop in January 2021, everyday “retail investors” (individuals investing their own personal money, as opposed to professionals investing other people’s money) grew to make up half that month’s trades on the Toronto Stock Exchange.

So, the investment decisions of the people could make a big difference for the climate. What do the people want?

Apparently, marijuana.

A greenback revolution

Within a couple months of cannabis being legalized in 2018, Canadian retail investors put over $4 billion into weed stocks. That’s half as much as the $9 billion a year that gets invested for sustainability impact in Canada. It’s also a third of the size of the federal government’s $15 billion Canada Growth Fund, which is meant to spearhead investment into clean energy. 

Fast forward to the end of 2022: by then, Canadians had allegedly lost $131 billion from cannabis investments, which is roughly equivalent to the $140 billion of investment needed per year for Canada to meet its climate targets. If even a portion of those investments had been rolled into sustainability opportunities instead, it would have had a material impact.

Most retail investors don’t invest into sustainability. Looking at the U.S. stock market in October 2021 as a snapshot, retail investors are buying stocks with poorer ESG risk ratings than the global average. About 40% of retail investor buys are of companies with a potential link to sustainability, such as the production of electrical products. This drops to 14% if Tesla is excluded for being problematic and NVIDIA is excluded for being so large that many of its activities are likely unrelated to sustainability.

If retail investors are avoiding sustainable stocks for presumed non-competitiveness, they should recheck their assumptions. When looking at the 37 most popular stocks amongst retail investors versus the 37 most sustainable companies according to Corporate Knights, their stock prices have grown in fairly comparable spreads. Yet no stocks are found on both lists.

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(For the more data-minded readers, note that the number "37" was chosen because, beyond the top 37 stocks, retail investment activity is vanishingly small).

Most young Canadians want a more sustainable world, with four-fifths reporting fear and anxiety over climate change. Yet most Canadians don’t invest at all. If investment patterns are similar to Americans, just about half of Canadians don’t do anything meaningful with the money sitting in their savings accounts. Effectively, passivity means financing fossil fuels, as Canada’s five biggest banks all finance fossil fuels more than sustainability by a ratio of over three-to-one.

To the extent that the discrepancy between caring and cash is because of a knowledge gap, young Canadians should have more access to financial literacy programmes and, if it makes financial sense, consider investing into the causes they care about. Buying stocks has never been easier, with many zero-cost online trading platforms available. For those interested in more directly financing sustainable action, there are platforms like SolarShare, where you can buy bonds (in other words, “give loans”) for building solar projects. For something maybe closer to home, RBC, Canada’s biggest bank, even has ESG Market-Linked GICs available (“Guaranteed Investment Certificate”, meaning you’re guaranteed to get your money back).

The financial market is still coming up with language to talk about earmarking investments for sustainability opportunities. One leading approach in Europe is to take the Green Asset Ratio (GAR), which is the share of total financial assets invested into government-recognized sustainable activities. In a preliminary study, Europe’s banking system was estimated to have a GAR of 7.9%. Subsequent studies have suggested that the number is closer to 2.3%, but still, 7.9% can serve as an aspiration for investing, similar to a lofty goal of 7% for donating.

Personally I don’t think I’m in a place where I’d feel comfortable donating anywhere close to 7% of my income. But I’d personally be prepared to invest that much into sustainability, and in so doing help open up a new front of activism.