Impact Investing in Climate Change Adaptation
Impact Investing in Climate Change Adaptation
The increasing demand for a more environmentally responsible finance ha has been best captured by the emergence of impact investing. This new approach began as the niche activity, mainly practiced by rich and philanthropically-minded persons, but today it is being advocated by a growing number of top ranked institutions. Before proceeding we need to understand what is impact investing.The phrase impact investing has been defined in many ways such as ethical investing, patient capital, socially responsible investing, community development finance, values-based investing, sustainable finance, responsible investing, environmental investing, blended value and many more (Freiireich and Fulton 11). For Rehman, Zhang, Uppal, Cullinan and Naseem (440), impact investing refers to investments that are made towards the generation of positive and measurable environmental and social impact, as well as related financial returns. Investors of impact investing actively place capital in businesses that produce environmental or social good in addition to financial returns.
Two key characteristics of impact investing can be derived from this definition. The first characteristic is investing. This means that impact investing must have equity financing. Secondly, the investment must have intended positive environmental and social impact beyond financial return to be considered impact investment (Tamimi and Sebastianelli 1660). The intent of impact investing to make an impact to society and environment is the qualifying criterion. Therefore, investments that inadvertently lead to environmental and social impacts are not considered impact investments. These two character tics help distinguish impact investing from philanthropic work. Impact investing includes investments such as offering market-rate financial returns and producing a return of principle capital.
Governments and communities lack adequate funds to address social and environmental challenges they face. Billions of dollars are required to address these problems, the kind of money only the financial markets and business can provide. With this increasingly insufficient public support, impact investing as a funding strategy is gaining popularity in the policy realm. Impact investing channels capital to institutions, projects and funds that produce both financial and social returns (Tamimi and Sebastianelli 1660). Along with governments and foundations, investment firms and banks are interested in the opportunity for new financial schemes to channel more money toward solving social issues.
Impact Investment In Addressing Global Environmental Challenges
Impact investing is gaining popularity following the 2008 financial crisis that plunged the capital markets. In the scramble to ensure social stability and protect jobs, governments did recognize the opportunity to do more than just making donations by shoring up private companies. Institutions and governments around the world started to invest in equity investments and loans, the basic tools of impact investors (Bugg-Levine and Emerson 93). As the world continue to experience population growth and to function in the increasing global economy, individuals and companies are undertaking important role in addressing social and environmental issues. Wealth managers, corporations, and private funds are influencing change while growing their capital and financial future at the same time (Bugg-Levine and Emerson 93). There is no doubt that impact investing is providing a different platform to address financial, environmental and social challenges rather than traditional charity work. Individuals and companies are counting on impact investing to shape the future with the funds that is allocated to be invested. As trends in impact investing continue to grow, funds allocated for social change via impact investing are increasing as well.
Moreover, wealthy managers and institutions are becoming impatient with traditional approaches in the eve of growingly visible global poverty and environmental damage. In response, a new crop of socially savvy entrepreneurs and businesses are initiating investments across many sectors and geographies that creatively structure investment capital to address social challenges and seek new market opportunities (Bugg-Levine and Emerson 93). These groups are findings their channels in impact investing. This discovery is upending a long held belief that charitable activities and profit making must not be mixed together in practice and practice. Businesses can play an important role in promoting the public good. Rather than seeing business as necessary evil, impact investors see it as a powerful force to be harnessed for common good.
Impact investing aspires to make a world where environmental and social variables are incorporated into investment decisions. Today, many corporations use their profits to pursue social goals besides the financial returns. As investors, companies have the fiduciary obligation to generate market-rate returns. But many of these companies see environmental and social considerations as an integral part of their fiduciary role (Pearce 252). Fund managers and company directors who incorporate ESG factors into their investment strategies are assured of better long term financial performance. Other institution has taken to pursuing impact investment tailored to produce long term financial performance and public good. According to Pearce (252), corporations are contributing to social causes as way of expanding their marketing, creating positive public relations and serving community needs in the view of producing consumer loyalty or obtain tax benefits. In order to create positive impact in addition to financial return, environmental impact musty be mentioned as part and parcel of the business strategy of impact investment fund. Additionally, any investment to qualify as an impact investment, positive environmental and social impact must be conscious, defined and measured.
Impact investing allows companies to grow and tap into a new market. Investments rather than donations enable companies to obtain commercial capital by way of alluring other investors to obtain equity stakes or securing loans. By assisting these companies access array of private investment funds, investors play an important role in allowing for innovative solutions and strategies to be scaled up (Bugg-Levine and Emerson 93). This kind of investment is growing in popularity as institutional investors and individuals (insurance companies, pension funds, financial institutions etc.) seek ways to get financial returns whilst making positive environmental and social impact (Birschel 69). Impact assets, which is donor-advised fund, blends the non-profit systems and for-profit system to produce financial, environmental and social returns (Sullivan 1). Impact investments tend to target the natural environment, the disadvantaged population. Environmental entrepreneurs like those operating in renewable energy and sustainable agriculture can have environmental l impact by practicing environmental investing. To have this impact, entrepreneurs just need to incorporate environmental focus into their business model and demonstrate the willingness to reduce the environmental impacts associated with anthropogenic activity.
Existing impact initiatives and funds show how resources can be leveraged to support social causes, such as poverty alleviation, health care, education and supply of services and products to disadvantaged populations. In addition to providing services and products to poor and vulnerable populations, impact investing focuses on addressing global issues like water scarcity, climate change, resource efficiency, addressing climate adaptation risk, nutrition problems, health care and waste reduction. Extreme weather events and failure of climate change adaptation are some of the global threats of concern. Investigating in climate change adaptation can help minimize extreme weather events currently witnessed around the world. Though impact investing can be made to any sector where environment and social impact is generated, it currently concentrates on healthcare, education financing, agriculture, and distributed utilities (Bugg-Levine and Emerson 93). The focus on these sectors indicates that impact investing is about long term benefits rather than immediate gains (Press 627). Investment is about the future.
The performance of socially responsible investment strategies depends on the institutional and economic environment, investment criteria and the preference of investors (Rahman 441). This concept tends to be mature in developed markets than developing markets. In addition to that, differences in investors’ behavior, and differences institutions and regulations matter a lot. Companies are adopting impact investment because they belief that it contributes to their long sustainable term performance (Jitmaneeroj 1497).
As Cajias, Fuerst, McAllister and Nanda (12) postulate, impact investment is a process through which managers evaluate, screen and monitor investments employing Environmental and Social Governance (ESG). Socially Responsible Investment (SRI) usually screens to avoid exposure to environmentally and socially harmful investments whereas impact investment intentionally seeks to produce a measurable impact via profitable businesses. ESG investment considers ESG factors when evaluating the business opportunity, these metrics can give ESG rating for investors and also report on company performance. Companies that demonstrate strong environmental and social governance in their practices obtain good scores in the environment, and Social Governance (ESG) scale. ESG metrics enable investors to align their business on ESC goals that can improve their rating.
Can Impact Investing Help the World Adapt to Climate Change?
Climate change has attracted much attention because it is a global threat of concern. The impacts of climate change are worsening over time. It continues to cause havoc around the world. Some of the solutions to combating climate change include investing in renewable energy and conservation. Conservation of blue eco-infrastructure, particularly in the coastal areas that are vulnerable to flooding, offers coastal defenses, storm protection, habitat conservation, water storage and recharge.
Climate change has provided new financial opportunities to investors in the renewable. Commercial and philanthropic capital is being put into climate change mitigation. Sustainable Development Goal 7, which is about universal access to energy, is closely associated with the achievement of virtually all of Sustainable Development Goals like education, employment, health, gender equality, poverty reduction, food security, climate change and poverty reduction. Energy industry is one of the leading contributors to pollution. Because energy is necessary, efforts should be made to decarbonize by shifting to alternative energy sources that are environmental-friend. The renewable energy opens up an opportunity to step up investments in alternative energy sources. Impact investors gave a role to play in clean energy system.
Following the Paris Accord, many investors are shifting their focus to investing in innovative technologies and initiatives that can combat the impacts of climate change. Impact investors seek to influence the financial market through the creation of new sustainable assets by growing the investment community investing in positive impact. Investors often choose an innovative approach.
Investing in renewable energy is not enough. Investors should ensure that people have access to affordable and cost friendly to the consumers. The post impact investment is created by increasing access to renewable energy for populations with energy. Impact investors are seeing the financial returns of socially responsible investing. Impact investment often parallels financially cautious investing. As the globe shifts to low carbon economy, companies find good financial sense to invest in sectors that are chief polluters. Institutions are pledging to increase their current environmental business initiatives in low-carbon business through capital raising, developing financial solutions, lending and investing. By developing mechanisms via which investors can simultaneously address environmental and social problems and get financial returns, impact investment provides the potential to increase the pool of available to finance innovative solutions. Impact investing can help coastal areas to adapt to climate. Foundations, institutions and governments can collaborate to creative finance adaptation measures to combat the impacts of climate change in vulnerable areas.
Adaptation responses will require significant capital flows toward impact investments. Enormous amount of money will be required to implement adaptation initiatives to prevent impacts of flood. Core to making sure the coastal areas are not exposed to erosion or inundation is the implementation of adaptation measures like protection, accommodation and managed retreat. Impact investment in conservation of vulnerable coastal areas has the potential to protect human population, critical infrastructure and structures, habitats and associated ecosystem systems.
Although many low-lying coastal areas are exposed to flooding, the real effects of sea-level rise depend on measures implemented by communities, cities and governments to prevent or adapt to such risks. The measures taken also must protect human population, infrastructure, assets and other critical structures. Netherlands is a good vase study worth studying. This country is exposed to flooding, yet the government and other stakeholders have taken measures to reduce the actual impact of flooding by constructing dykes, flood barriers, levees and dams. Adaptation to sea-level rise fall into three broad categories: protection, retreat and accommodation. Accommodation strategy allows the extended or continued use of areas prone to sea-level rise hazards (Haman, et al.788). Under accommodation approaches, little is carried out to prevent the coastal areas from being flooded. Rather, existing infrastructure and other structures are designed and modified in such way to withstand the impact of sea-level rise. For instance, buildings are elevated onto pilings to withstand the impacts. Other interventions include practices like insurance flooding, flooding warning systems, shifts in land use, building of emergence escape routes and shelters (Nicholls 1457). This strategy may also involve encouraging salt-tolerant crops, improving drainage system and restoring sandy beaches. The explosion of raised buildings in New Orleans after the 2005 Hurricane Katrina is a perfect exemplar of accommodation technique in practice.
Accommodation strategy allows effects of natural system to occur but its impacts are reduced by modifying human use of land through flood-resilience measures. By permitting sea-level rise to take place naturally, accommodation techniques afford the coastal habitats the opportunity to shift spontaneously as well. But the preexisting patterns of development may prevent total habitat shifts.
Protect places involves using engineering structures to prevent impacts of sea-level rise (King, McGregor and Whittet 99). Under protective schemes, soft and hard protection techniques are employed to control coastal erosion and flooding. Hard structures are used to protect critical infrastructure and facilities by blocking the inflow of sea water. Hard measures are well suited to immediately protect coastal assets and infrastructure from inundation. Hard techniques like jetties, seawalls, dikes, breakwaters and groins are applicable in areas which are intensively developed. Armoring involves structures like sea walls and levees that fix shorelines in their current place. Armoring is a widely employed tool for protection of wetlands and developments. In their hardened form, engineered sea bulkheads and seawalls provide defense to shoreline against strong wave action.
Dams are designed to control floods. They are usually constructed perpendicularly to the water body, particularly the mouth of rivers to stop the invasion of the inland by storm surges. On the other hand, breakwaters are stoned or wooden structures destined to protect particular zone. Drainage pipes, sewers, culverts and canals are a crucial part of flood protection.
While seawalls and dykes are can protect assets from inundation, their use is controversial due to their negative impact on beach erosion. Minus engineered breakwaters or vegetation, sea walls can exacerbate beach erosion with time. Seawalls are incapable of building land and therefore may not shield the land loss from sea level rise. Furthermore, it can be challenging to implement hard measures where they are no institutional capacity or adequate planning. In addition, seawalls are known to dissipate or reflect wave energy to adjacent neighbors. This means that waves battering seawalls along one part will be deflected to adjacent property with greater waver wave energies.
With soft protection, natural vegetation and sedimentation are used to serve as a buffer zone. Soft protection strategies are gaining popularity among environmentally-minded planners because they are eco-friendly and low cost as they can be supplied by natural processes. Replenishing vegetated habitats and natural beach like dune systems, coconut-fiber stone units, afforestation, marsh tidal flats and mangrove thickets, aids to reduce and combat erosion and disintegrates wave energy (Nicholls, 1456). Mangrove planting or restorative is inexpensive and able to reduce coastal erosion by modulating wave energy and stabilizing sediments. This in turn reduces flooding through sediment accretion. In Barbados, beach nourishment and shoreline armoring are used to halt shoreline migration and control erosion (Mycoo 50). Beach nourishment involves adding material to the beach. The added material should be similar to the naturally occurring material in the beach. A dredged material may be used to nourish a poor beach. Sand dunes are used to trap beach material and sand being washed or blown away. Soft protection is beneficial where there are forests and sand dunes around. Sand dunes can be stabilized by way of planting vegetation cover. New wetland serve as sponges, minimizing water flow when flooding occurs.
Wetlands or living shores protect shorelines and estuaries from erosion and flooding by absorbing wave energies. Examples of wetlands include mudflats, pebble beaches, marshes, rocky shores and tidal basins. Bio rock reefs are able to allow damaged coral reefs to grow and provide coastal production. Live shores can create habitats for wildlife and fish, offer recreational space and filter contaminants out of freshwater. Benefits associated with soft protection include wild habitat conservation, sedimentation encouragement, improvement of water quality and local fisheries. Tidal barriers like gate or dam can help manage sea-level rise and tidal flows in harbors and bays.
Retreat refers to strategic decision to safely relocate or withdraw public or private assets that are vulnerable to coastal hazards like sea level rise and flooding. This allows flooding and sea-level rise to advance uninterrupted. It includes prohibiting new developments in coastal areas at risk to inundation as well. This strategy limits the employment of protection measures, and discourages any development in coastal areas vulnerable to sea-level rise. Retreat also involves planning eventual relocation of infrastructure and building to regions with lesser or nor risk. Retreat is important adaptation option to accommodation and protection techniques to manage hazard risk.
To some communities, retreat strategy may seem impossible due to huge costs associated with relocation. Not every community has the same quantity of resources to implement managed retreat strategy in response to rising sea levels. Like protection, managed retreat is controversial too. Resistance to managed retreat measures from different quarters is likely. Evacuation of homeowners without monetary compensation is likely to attract resistance if they are permanently forced out of their property. Uncertainty about projected future sea levels and private property rights are some of the arguments people give for their refusal to evaluate coastal areas prone to impacts of sea-level rise. Rising sea level requires appropriate mixture of accommodation, retreat and protection. For this reason, many real adaptation responses are hybrid and combine several options from the three approaches. For example, adaptation may combine hard and soft protection measures with flood warning systems to protect coastal areas prone to flooding.
Information schemes like hazard mapping, disaster preparedness, flood warning systems and evacuation are complementary to accommodation, protection and managed retreat. Though there is increasing awareness to adapt to sea-level rise, handful of countries is prepared for this disaster. Owing to their vulnerability, Netherlands and Britain have taken measures to adapt to the impacts of rising sea levels.
Integrated coastal zone management, abbreviated as ICZM, is both an adaption response to sea-level rise and a tool for proper governance of coastal areas. Governance of coastal spaces is based on the tenet of sustainable development by regulating access to coastal resources. The ICZM plan considers both long term and short factors that shape the coastal spaces.
Adaptation measures require public education and participation. Effective adaptations are those that are well supported and supported by stakeholders and the local population. Social cohesion is necessary for many elements of adaptation like building of seawalls. Changes in land use policies, zoning laws and forced retreats can result in conflicts of interest if there is no public participation and involvement of relevant stakeholders. Public participation and stakeholder enable the process of decision making to put into better use the local observations and knowledge, which often surpasses scientific observations. When scientific data corroborates local observations, valuable information is produced.
Sea-level rise presents a serious threat to the human population living in low-lying coastal areas and natural system that support these communities. Rise in sea level will negatively affect coastal communities and habitats by increasing the frequency and risk of flooding, erosion of cliffs and beaches and destroying important marine ecosystems (Nicholls et al. 129). The effects of sea-level rise include intense flooding, erosion, ecosystem change, rising water tables and salinity. The immediate impact of sea-level rise is the intense flooding and submergence of coastal lands.
Coastal inundation refers to land flooding by river catchments or ocean waters. The magnitude, frequency and extent of coastal inundation are changed by global warming and through combined interaction with storm surges, tidal ranges, and sea-level rise. Coastal urban cities situated on low-lying coastal regions vulnerable to flooding are obviously prone to sea-level rise. Salt marshes, lagoons shores, estuaries and delta plains are likely to suffer temporary or permanent inundation when the absence of sediment input limits vertical accretion. The advancement of tide lines landward can cause the intertidal zone to become submerged. Due to this submergence, the lagoons and estuaries are likely to enlarge. Coastal flooding results from storm surges that are produced by powerful onshore winds and tides.
Exposure to erosion is anticipated to increase largely because of rising sea level. This means that human settlements and infrastructure are vulnerable to erosion. Coastal erosion is associated with loss of land. Supply of onshore sediment has been depleted since the start of post-glacial transgression. Moreover, the construction of dams has curtailed the supply of fluvial sediment in recent times. The reduced supply of sediments triggers erosion on retreating or stable shores. The rising sea level is likely to bring wave action to higher levels, thereby allowing strong waves to reach the shores. Coastal erosion will be amplified by strong storm surges that penetrate inland. Erosion of soft cliffs and beaches and loss of wetland exacerbate the impacts of sea-level rise. Erosion of sand dunes, mangroves, coral reefs and salt marshes degrade natural protection leading to increased risk of coastal flooding.
An increase in mean sea level will lead to extreme sea level events. Changes in storm features could influence extreme sea levels too (Church et al. 23). Extreme sea-level rise will threaten unprotected and low-lying areas, human population and infrastructure. Extreme sea level rise result from the combined interaction of wave action, storm surges, astronomical tides and mean sea-level. Low coasts bordered by sand beaches and steep coasts are vulnerable to erosion due to retreating of sandy shorelines. Sea-level rise causes extreme sea levels, making inundation more likely. Extreme sea-level rise causes more flooding than storm surges.
There has been impressive growth in impact investment market but serious challenges abound. To begin with, a track record for successful impact investments is lacking. Market players are concerned about the feasibility of positive impact. In addition, there is handful of actors active in impact investing. These actors constitute about 1%, which is a small number. Most players are yet to venture to this market given that impact investment is a new and young field. Many market players are quite unaccustomed with this kind of investment. They feel that returns (social) are immeasurable. Third, there are no universally agreed ratings of impact investments. There is no single universally agreed definition for impact investment. Moving forward, there is need to address these challenges. There is also the need to strengthen impact investing identify, change the paradigm governing investment behavior and develop tools that support the incorporation of impact into routine analysis, decision making of investors.
Conclusion
Impact investment is an investment through which investors target to produce financial returns for themselves and measurable positive impacts for environment and society. Impact investing seeks to create triple bottom-line performance with the intention to generate positive outcomes for environment and society. Investors achieve this by investing in companies that sell services and products that improve lives of vulnerable populations or develop innovative solutions to social and environmental problems. The opportunity for impact investing is much larger than predicted. Growing economic demand among the most disadvantaged and vulnerable population, climate change at the global scale and an increasing population that coincides with the underfunded welfare state can expand the opportunities for investment market. Impact investing can potentially play a critical role in many challenges facing environment, health care, education, and poverty and water scarcity.
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