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As businesses manage their climate risk, they should address climate inequities, too

Businesses may view climate-vulnerable communities   as a source of risk that should be avoided. Instead, they should be investing in ways to make those communities more resilient to climate change.

As businesses manage their climate risk, they should address climate inequities, too
[Photo: Alextov/iStock]
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Recently, the Biden Administration released details of its Justice40 Initiative, which would direct 40% of the administration’s climate and clean energy investments to disadvantaged communities. Meanwhile, the White House Environmental Justice Advisory Council is developing an environmental justice screening tool to identify these communities, taking us one step closer to providing a fair environment for those who bear the brunt of climate change.

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Climate and environmental justice carry distinct, complex histories and academic definitions, but they can overlap: Some disadvantaged groups face disproportionate impacts from climate events like heat waves and floods, and tend to live and work in closer proximity to polluted water and air. In the U.S., there is a long legacy of racist housing policy and poor planning that resulted in outsized exposure to both pollutants and extreme weather events worsened by climate change. As the climate continues to warm, climate and environmental justice issues will continue to exacerbate existing inequities, and eventually, will need to be addressed in tandem.

Biden’s Justice40 program understands this linkage on some level, and is effectively directing its climate efforts toward the most vulnerable. But businesses and investors have a role in perpetuating climate and environmental inequities, so how should they approach this issue?

We very well know that businesses are beholden to their shareholders and investors to their returns, and this can complicate their efforts to take climate actions that are just and equitable. We must acknowledge the fact that the investment and business community may view climate-vulnerable communities — those same ones to be funded by the Justice40 program — as a source of risk that should be avoided. In my near decade of providing investors with physical climate risk data, many are quick to divest from assets, companies, and regions that will be impacted by climate change.

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This is how investors are accustomed to hedging traditional risks: Move money to safer shores to safeguard future returns, at least temporarily. In practice, this leaves the most exposed communities and the most vulnerable sectors ill-equipped to prepare for ever-greater impacts of climate change. As a climate researcher, this scares me. While there is no current law barring companies and investors from divesting away from climate hotspots, there are real societal and economic consequences when a company or an investor removes themselves from a community.

[Screenshot: First Street Foundation]
In 2020, BlackRock, the world’s largest fund manager, made a bold commitment to divest from coal to ready themselves for the transition to cleaner energy. Now, let us imagine an investor the size of BlackRock decides that companies involved in farming in the increasingly water-scarce Central Valley of California are no longer tenable, or a lender the size of Freddie Mac finally refuses to underwrite the 23.5 million U.S. properties at risk of flooding over the next 30 years.

Some climate-exposed communities in the U.S. are already facing a financing dilemma as property values decline due to encroaching sea levels, which may then lead to decreases in revenue from property taxes, making it difficult to maintain credit ratings and attract bond investors for much-needed investments in education, health, and transportation services. All of which could send the most climate-affected communities into a cycle of debt.

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A 2019 article by political ecologist Kimberley Thomas and geography and environmental studies professor Benjamin Warner characterized this perverse effect as the “weaponization of vulnerability” to climate change, or cases in which “people’s vulnerability is being used against them . . . exacerbating their precarity by excluding them from much- needed and due assistance, while directing resources instead to bolstering the well-being of those already well positioned to respond to climate threat.”

Much of the focus of divesting from climate risky sectors has focused on fossil fuels; but sectors like agriculture, which depend heavily on a workforce sensitive to changes in heat and climate-sensitive resources like water, may suffer from divestment in a different way. In 2014, the Smith School at Oxford University estimated the total value of agricultural investments at risk due to changing-climate patterns was between $6.3 trillion and $11.2 trillion, across a range of different scenarios. Without smart agricultural practices and significant investments in climate-proofing the growing and food production process, the major breadbaskets of the world will have to grow more food with 20% less dry-seasons rainfall, due to climate changes alone, regardless of the scale of emission cuts in the decades to come. If investors react to these risks by divesting from agriculture companies and communities, then it would necessitate massive public sector investments to support the millions of families that depend on agriculture for jobs and subsistence.

Somewhat unsurprisingly, the communities that are disproportionately exposed to environmental pollution are also often more exposed to climate-change impacts. The State of California, for example, utilizes a screening tool to identify which communities are eligible for special funding, based largely on their proximity to waste or toxicants (see CalEnviroScreen below). Meanwhile, businesses and investors may not as actively use these tools in their everyday decision-making, but they most definitely pay attention to geographic risks related to climate change as a way to identify places to avoid.

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Unfortunately, the dichotomy between how the public and private sectors deal with climate and environmental justice is not complimentary. Private sector divestment leaves a vacuum that cannot be entirely filled by government programs. When companies close shops or investors sell off physical assets in a region perceived as an emerging climate hotspot, the local community is left without jobs, which may eventually tailspin into more economic deterioration. Initiatives like Justice40 are much needed, but will not be enough to stave off the effects of divestment and capital flight.

So what can the private sector actually do? To begin to confront and mitigate the role that investors and business play in contributing to climate and environmental injustice, the private sector will need to adopt some transformation strategies:

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  • Stop polluting, full stop. Work to reduce pollution and emissions to the most technologically feasible levels during the transition to a low-carbon economy.
  • Stop moving capital from high climate-risk areas to less risky areas. If divestment is absolutely necessary, then invest in improving abandoned properties and/or help assist in equitable and managed retreat for employees and the wider community.
  • Understand that the effects of climate change are not just felt in the places where people live but also within the workplace, and climate change will place a particular burden on people working in the sectors most sensitive to changes in extreme weather patterns.
  • Utilize risk-screening tools, like the ones being developed by the Justice40 program, alongside climate risk-screening tools to identify where to partner and make investments in the value chain.
  • Invest a percentage of revenues into the most vulnerable communities that are direct or indirect stakeholders of the company’s value chain.
  • Find a local partner to incorporate frontline communities in equity-focused efforts through organizations, such as the Climate Justice Alliance. Learn how local organizations, such as the Partnership for Southern Equity, work with businesses on these issues.
  • Hire local and promote employee ownership by joining the thousands of companies that allow employees to own stock in their workplace through Employee Stock Ownership Plans.
  • As an investor, participate in the Coalition for Climate Resilient Investment or Climate Action 100+, a group of investors and government helping direct resilient investments into the most vulnerable geographies in the world.

The world is still a long way away from being prepared for climate change, but with the larger and more climate-related impacts looming, it is time investors and businesses start exploring new ways of investing into the communities they depend upon before abandoning them altogether.


Nik Steinberg is a climate change researcher and practitioner with Ramboll.