The gas crisis is a sign that we need to accelerate green investing

A perfect storm of conditions in Europe has nearly quadrupled natural gas prices in Europe this year and more than doubled them in the US.

The effects of this should serve as a clear warning sign of the further negative consequences we face for failing to address climate change quickly enough by reducing our dependence on fossil fuels to reach net-zero emissions targets.

Besides increases in macro-economic risks related to environmental deterioration, we are also threatened by the potential for massive inflation and additional financial burdens such as carbon taxes.

The recent UN report Some Progress, but still a big concern contained some worrying findings, suggesting we are not on track to reach the 2015 targets set at the Paris Climate Conference. There is still more that we must do if we want to achieve the net-zero targets we have set and help the planet transition to be a better and greener place. Governments and corporates need to work together to reduce demand for fossil fuels, whilst encouraging investments in sustainability solutions.

The EU has already set an ambitious target of reaching carbon neutrality using 80% renewable energy by 2050, and is increasingly encouraging investment in new solutions to achieve this, such as focusing on using hydrogen as a step away from natural gas and towards wider decarbonisation.

Converting renewable energy into hydrogen, which can be stored in large quantities for a long time to balance out irregularities in renewable energy supply, is just one of many emerging green solutions that the world needs to use to address the impending energy and climate crises. The development and commercialisation of these technologies have only recently been made possible by the increasing trends towards green investing, funding the development of new environmentally friendly technologies and projects.

The environmental crisis has mobilised investors to increasingly back companies offering sustainable solutions, adhering to solid environmental standards and using the right science-based metrics to measure their progress.

Over the last few years, there has been a clear growth in investors’ appetites to factor in non-financial and environmental considerations into asset allocation decisions. This has mainly been seen with the increasing scrutiny placed on ESG credentials, which investors use to encourage sustainable behaviour and punish wrongdoing.

However, questions still remain over whether ESG focused investing is enough. Companies can tout a superficially strong ESG rating buoyed by good governance and social metrics, while they fail to address environmental concerns.

Likewise, companies that are taking the biggest steps to address the environmental crisis can be overlooked by investors if their governance and social metrics do not measure up. This highlights the important distinctions that need to be drawn between sustainability and ESG investing.

Investors are also facing problems over the lack of an internationally recognised and agreed ESG standard. Both companies and investors face a multitude of choices over which of the many ESG frameworks to follow. The lack of widespread international agreement over which to follow makes it different to compare the ESG credentials of companies in different regions globally, which diminishes the effectiveness of ESG investing in addressing climate concerns.

A push towards greater unified international adoption of reporting standards will be a great step towards solving this. Governments need to use the upcoming COP26 summit as an opportunity to recognise the potential that sustainable investing has to be a powerful weapon in addressing the climate crisis by creating actionable policy plans which encourage more responsible corporate behaviour.