Just a few months ahead of the next climate summit, COP27 in Egypt, the world stands at a ‘now or never’ moment, to use the language of the usually sober Intergovernmental Panel on Climate Change: either we slash carbon emissions by half by 2030, or we prepare ourselves for the ravages of climate breakdown.
The latter scenario serves no one, certainly not the international finance community. As assets owners, we invest in businesses and infrastructure for the long term. But in a global economy increasingly beset by soaring temperatures, freak weather conditions and rising oceans, ‘long term’ is too late.
The good news is that the capital to fund a net zero transition is available. The bad news is that it is not being deployed nearly enough.
That said, recent years have seen a flood of innovative pilot schemes. Welcome as these are, however, we cannot ‘pilot-project’ our way out of today’s looming climate catastrophe. Africa alone needs an estimated $3tn by the end of this decade to achieve its collective climate goals. For the world as a whole, we’re looking at anywhere between $3tn and $6tn per year until 2050.
With the best will in the world, this kind of funding is not in the gift of public lenders or charitable foundations to give, particularly in today’s fiscally constrained times. Private firms, in contrast, control financial assets in excess of $210tn, roughly twice the gross domestic product of the entire world. The key question, therefore, is how to get this money working.
Opportunities for growth
The awareness of business leaders and those who finance climate solutions about the materiality of climate risks is growing all the time. Growth opportunities linked to low-carbon and clean technology solutions are clear: in 2020, the value of the cleantech sector jumped nearly $1tn in a single year.
The obstacle to progress is more straightforward: asset owners and institutional investors have a duty to their clients only to achieve a reasonable risk-adjusted return. And, truth be told, many urgently needed climate projects and technologies at present simply do not cut it.
This is especially the case in developing markets, where factors such as political instability and weak rule of law frequently act as red flags. This is deeply regrettable. Not only are these markets ripe for ‘green growth’, but, as low emitters of historic emissions, they have a strong moral case for investment assistance in countering the punishing effects of climate change.
The time has come to shift up a gear
At the Net-Zero Asset Owners Alliance, it’s our strong conviction that working in closer partnership with multilateral lenders and developing finance institutions can provide an answer. Public funders have an explicit mission to support development and consequently have higher risk thresholds. Using that mandate to adopt mezzanine positions in blended finance vehicles, for example, would make a multitude of transition projects more viable for private asset owners that are climate-conscious but risk-sensitive, we believe.
It’s not just about de-risking climate projects. Building a pipeline of commercially investable projects is also vital, and something that development banks and other public entities in the climate space are perfectly positioned to support. The same is true for building the capacity of local experts to conceive, design and implement a pipeline of bankable projects.
More action needed
As we argue in our Call to Policymakers, published recently, blended finance needs further activation. Investors are ready to provide capital, financial vehicles are available and success factors for projects are known and tested. But project work on the ground is missing. Multilateral development banks (MDBs) and development finance institutions (DFIs), investors and governments must organise and support this, while affordable and longer-tenure foreign exchange solutions must continue to be facilitated and scaled.
The time has come to shift up a gear: pooling the resources of catalytic capital providers; increasing DFIs’ and MDBs’ private capital mobilisation; making credit risk data more readily available; and altering guarantees so they are eligible for official development assistance. These are just some of the immediate steps that could take blended finance from a fringe idea to a mainstream solution.
UN general secretary António Guterres’s closing speech at last year’s global climate summit in Glasgow included sound advice for helping emerging markets to transition to a low-carbon economy. “We need to build coalitions of support,” he stated, “including developed countries, financial institutions, [and] those with the technical know-how.”
Blended finance fits that description to a tee. Private investors are on hand to make it happen. To give climate projects in hard-hit regions the investment boost they desperately need, however, depends on public lenders and governments opening the door to collaboration. Governments could work out long-term development targets and related projects. The financial models exist. The political will must now follow.
Günther Thallinger is the chair of the UN-convened Net-Zero Asset Owner Alliance.
This article first appeared in Sustainable Views, the FT Group's platform on ESG policy and regulation.
