We All Face Climate Justice Risk: Investor Inaction Increases Investment Risk

As extreme weather, species loss, rising oceans, and other consequences of our changing climate accelerate, investors must consider not only what action they can take to shape a more sustainable future, but also who must be included in solutions. While the effects of climate change will be felt by all, certain geographies and demographics face disproportionate harm. Disregard for the varied climate burden yields an irresponsible investment strategy, opening the door to excessive regulatory, legal, reputational, and financial risk. Conversely, embedding environmental and social goals into investment strategy generates invaluable opportunity and long-term stability.

Why This Matters

• We Are the Faces of Climate Risk: The face of climate justice is the face of your family and you. 80% of those displaced by climate change are women. Climate justice impacts everyone, everywhere, to different degrees.

• Investment Risk: Not only do regulatory, legal, and reputational risks pose a material threat to bottom lines, but increased volatility poses systematic risk. Instability in natural and social environments translates well to instability in capital markets.

  
  

We All Face Climate Justice Risk

Most investors have begun to view both climate change and social inequality as material financial risks, yet few appreciate environmental and social issues as two sides of the same coin. In fact, climate change serves as a multiplier for social inequality, specifically among women, people of color, and low-income communities, all of whom face disproportionate climate consequences.  

In the United States, people of color are more likely to breathe polluted air and live near coal powered plants or toxic sites, generating a cascade of negative health and economic effects (Green America). In double jeopardy, these communities also often suffer reduced access to health insurance and medical services (Common Wealth Fund). Minority communities in the U.S also tend to experience decreases in wealth following natural disasters, while the opposite is true of white counterparts, who see higher levels of reinvestment following extreme weather events (Princeton). Finally, Indigenous People are on the frontlines of 40% of global environmental conflicts, despite representing only 5% of the population (SDG). 

On global scale, women are more likely than male counterparts to experience poverty, typically hold less socioeconomic power than men, and consequently are more vulnerable to climate related risks. In fact, 80% of those displaced by climate change are women (UNICEF). Particularly in rural areas, women also tend to be more reliant on natural resources (UN). As extreme weather intensifies, tasks like collecting water and firewood—primarily carried out by women—will become increasingly difficult and time consuming, perpetuating cycles of poverty and dependence.  

An accurate analysis of environmental or social risks must take an intersectional approach—appreciation of interconnected and overlapping systems of discrimination across social categorizations, as coined by Kimberlé Williams Crenshaw. Investors and financial intermediaries must account for the disparate impact of climate change by embedding strategies climate justice in their strategies.  

Investor Inaction Increases Investment Risk

Pursuing climate justice is a core responsibility of any investment organization. Without action, the compounding effects of climate change on current and historical injustices will continue to erode the broader socioeconomic conditions which capital markets depend upon. Without comprehensive climate justice policy, businesses face four main risks:

• Regulation and Policy Risk: Climate justice was propelled into the minds of investors through landmark policy in the EU’s green new deal and Bipartisan Infrastructure Act in the U.S. Despite political headwinds in both spheres meaningful environmental change is here to stay—including movement on environmental justice. Businesses who ignore these issues risk regulatory fines, exclusion from governmental work, and permit delays or denials.

  
  

• Legal Risk: Enhancements in technology have generated increasingly robust data on companies' environmental impacts, generating excellent fodder for costly litigation. 3M will pay $10.3 billion for PFAS contamination of public wells, while Sotera Health faces over $750 million in liabilities over harmful emission of ethylene oxide, linked to cancer clusters in marginalized communities (Parnassus Investments). The legitimate risk of legal action, particularly by communities disproportionately harmed, costs companies and investors alike through legal fees, payouts, and volatile or overvalued stock prices.

  
  

• Reputational Risk: Akin to legal risk, increasing transparency and reporting requirements allow investors and consumers to evaluate companies’ environmental policies themselves. Investors are demanding clear and consistent action on climate justice, bolstered by working groups and consumers who are increasingly “voting with their dollar” on climate and social issues.  Investment in projects and with partners who develop and deploy climate justice circumvents fallout from consumers and investors and bolsters broader reputation.

  
  

• Investment Risk: Not only do regulatory, legal, and reputational risks pose a material threat to bottom lines, but increased volatility poses systematic risk. Instability in natural and social environments translates well to instability in capital markets. Without a shift in investor sentiment to embody climate justice, neighborhoods become uninsurable, liabilities grow unmanageably high, and long-term value evaporates. Ultimately, a functional, just and healthy society generates stable markets key to long term financial success.

Action Items: Opportunities

Despite the risk of repeating historical missteps, well-designed market solutions can play a defining role in climate and social transformation. Indeed, the opportunities of action are far more enticing than the threats of inaction.

Social and environmentally driven initiatives have historically been undervalued by markets, though thoughtful ESG integration has begun to mitigate this misvaluation by providing a “halo effect” that enhances firm reputation, investor perception and thereby stock price (Barka et al. 2023).

The role of allocators in capitalizing upon climate justice opportunities is paramount. Already, players are taking advantage, from investment in digital water technologies to provide clean and safe drinking water to disenfranchised communities, to pay-as-you-go solar power firms that build wealth in the Global South (Cambridge Associates).

Opportunities with real returns in financial, social, and environmental capital are ample.

Moving forward, asset allocators should prioritize climate justice, and other ESG benchmarks, in investment policy statements and work with fund managers to see that these commitments come to fruition.

Communities and companies around the globe have a lot to lose to climate change. However, the crisis simultaneously provides an opportunity, specifically to the financial sector, to step up, stride forward, and build a world that is more sustainable and just.