Global Warming: Institutional Investors The challenges posed by climate change are changing the investment landscape worldwide. Increasingly, institutional investors are rethinking their long held views on climate change and environmental risk. Today, many v CMS's (vendors of carbon credits) are re-evaluating their portfolios to reflect increased awareness of the global carbon risks. As a result, they are reallocating their investments, with some focusing more on clean energy, others on the development of green technologies, while others continue to invest in the fossil fuel sector.
The changing attitudes of institutional investors are encouraging governments to increase their efforts in developing greener policies, and enact policies that will mitigate greenhouse gas emissions and reduce carbon emissions. While these policies will slow down the rate at which carbon is emitted into the atmosphere, many economists and investors believe that it will take many years for sufficient emissions to be cut to meet global warming targets. The policies currently being debated around the world are causing a shift in investor behaviour. These same policies will need to be underpinned by a coordinated global response - and the actions of individual countries will need to match those being taken by international institutions.
Putting Carbon Markets to Work for the Public: A Public Approach One of the advantages of investing in carbon markets comes from the fact that the policies that are being pursued at a global level will affect us all. That's why governments at all levels are putting together plans to implement carbon markets, with the hopes that they will reduce emissions. For example, investments in "green technology" and other projects aimed at reducing carbon emissions by a large percent can ultimately increase China's share of world exports and increase its share of world economy.
There are a number of policy areas that governments around the world are currently pursuing. Governments can adopt direct regulation, or establish price signals for emitting carbon, or establish allowances for certain emitters and provide incentives for everyone else to reduce emissions. For investors, the focus should be on carbon markets that consider active participation by institutional investors. Institutional investors tend to have greater risk appetite, although there are some companies that trade over the counter without regulation, and some who are considering taking carbon risks without regulatory oversight. Institutional investors are typically global financial firms with significant presence in various countries, including countries where the risk/reward profile of carbon trading may not be optimal.
Some experts have suggested that by encouraging more voluntary carbon markets and encouraging more VNSA participation by institutional investors, global warming and climate change mitigation efforts may be successful. This seems like an area where the benefits derived from increased VNSA carbon participation could be quite large relative to the costs. Of course, increased VNSA carbon participation will also likely increase the incentives for companies to become more responsible, which would also increase the attractiveness of the markets to both institutional investors and individual investors. In the end, increasing VNSA carbon participation should be a positive thing for the global effort to reduce carbon dioxide emissions.
There are some environmental groups that are urging the U.S. to use tradable carbon credits as a way of driving down emissions. These groups would like to see the U.S. adopt a trading system similar to those used in Europe and Japan. However, these systems do not work well for the U.S., because it is difficult for companies in the U.S. to bear the costs of trading carbon credits. At the same time, it may not be possible for the U.S. to develop equivalent markets for carbon credits. Some environmental groups have also called for the creation of a "world-wide green standard" as a way of driving down global warming and climate change risks.
While it is too early to say what the future might hold for carbon markets, there is a growing body of evidence suggesting that emissions should be made more efficient. One promising way to make efficiency improvements is through the use of compliance carbon markets. Compliance carbon markets are similar to the markets that are used in the European Union and Japan, but they work in a different way because they are designed to ensure that companies do not use inefficient processes and emit more carbon than they should.
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