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Fast Tracking Finance

Fast Tracking Finance: The crucial role of investors and financers in the Climate Decade

23rd September 2021 Anita Hawser 5 min read

We need $4 trillion in investment in climate solutions every year for the next 30 years. That’s what it’ll cost to rebuild the world in a healthy way, and stay below the small remaining carbon budget for limiting global warming to 1.5°C.

“Right now, we're spending about $800 billion,” Tom Steyer, co-founder of Galvanize Climate Solutions, stated during Climate Week NYC’s session on “Fast Tracking Finance: The crucial role of investors and financers in the Climate Decade.” “So there's a $3 trillion spread between what we're doing and what needs to happen.”

Choices around capital will determine whether or not we get it done

How capital is deployed will determine the quality of our lives and the lives we leave for our children and grandchildren, said Amy Davidson, executive director for North America at The Climate Group. But can investors and financers bring to bear the massive amounts of capital that are now needed to rapidly scale climate finance and accelerate sustainable business models that are working?

Steyer said money needs to go into entrepreneurship, venture capital, expansion capital, all the way to project finance. “The private sector has to show up here in a huge way,” he said. “Everybody has to pull together. This is a society-wide problem. We also need NGOs and the multilateral development banks. We need governments all pulling together. And lastly, it needs to be fast.”

Green tech is in, fossils fuels are out

So will investment money that once flowed into new coal plants and fossil-fuel exploration now be invested in solutions that help build a low-carbon future? Insurer Aviva Canada announced at Climate Week NYC that it would stop insuring companies that make more than 5% of their revenues from thermal coal and unconventional fossil fuels by the end of this year.

“It's about setting hard and transparent targets that you're going to hold yourself accountable to and allowing others to hold you accountable,” said Jason Storah, CEO of Aviva Canada. “You need to invest and underwrite with intent.” To that end, Aviva is a member of the UN Net-Zero Insurance Alliance, which is working on a methodology for net zero underwriting.

When we charge what carbon really costs, the market will respond

“We need to price carbon and remove subsidies for fossil-fuel industries, which are giving a false read on risk and returns for the markets,” said Anne Simpson, managing investment director, Board Governance and Sustainability, at CalPERS (California Public Employees' Retirement System). “If we got that, it would mobilize capital at a scale we've not yet seen.” She said investors need to behave like owners of corporations, using stewardship to ensure boards of directors are climate competent.

“Replacing directors at companies like Exxon Mobil is a sign of things to come,” she said. Pension funds also need to integrate climate change into their capital allocation decisions. “It's not about divestment or whether our portfolio looks clean and green,” explained Simpson. “It's about major transformation of the economy.”

Banks can leverage capital to drive sustainability

Alexandra Liftman, global environmental executive at Bank of America, says it is mobilizing $1 trillion in capital over the next decade to drive adoption of existing low-carbon solutions and to develop new ones. “It is about accelerating those commitments and outperforming what we did last year,” she said.

Client engagement will be critical, she added, in terms of helping the bank better understand emissions in its loan or investment portfolio. The company also wants to more effectively align investment dollars with opportunities that are part of the roadmap toward decarbonization.

What role could philanthropy play?

Endowment funds like Harvard Management Company are building portfolios that invest in the green economy. But these investments may require some initial upticks in emissions, said Michael Cappucci, Harvard Management Company’s managing director of Compliance and Sustainable Investing. “For example, rail will have a significant role to play in the green economy, but that means building more train engines and manufacturing steel for rail lines,” he explained. “That requires short-term emissions.”

In any case, anyone seeking to use their philanthropic dollars for the good of the earth will need to look closely at both their portfolios and outlay. “Investing as usual isn't going to cut it,” warned Principles for Responsible Investment CEO Fiona Reynolds, pointing to the Net-Zero Asset Owner Alliance her company created with the UN’s Environment Programme Finance Initiative.

The world’s largest asset owners are collaborating to take bold action on climate change

Reynolds said the Alliance is the boldest action to date by major asset owners to decarbonize the economy. It comprises 50 of the world's largest asset owners, representing more than $7 trillion in assets under management. They have committed to transitioning their investment portfolios by 2050, as well as setting targets for 2025.

We must learn from our mistakes

In the past few years, increasing amounts of philanthropic and private capital have also flowed into the climate space. Susan Mac Cormac, a partner at Morrison & Foerster, noted that $7 billion was invested in oceans over 20 years, yet they had had gotten worse, not better. This outcome clearly didn't represent the best return on investment. So, she asked, where could philanthropic capital be better spent to have the greatest impact on climate?

Dr. Andrew Steer, CEO and president of the Bezos Earth Fund, said it had $10 billion to spend, admittedly a small amount of money when it comes to addressing the climate crisis. Nonetheless, he said, there actually is enough money to address climate change. “The problem is it's going to the wrong place. There are bad government policies or weak regulations. The role of philanthropy is to quickly and boldly engage.”

Philanthropic risk takers can help pave the way forward

Visionary philanthropy could play a vital role in nurturing the solutions of the future. For instance, the philanthropic sector could help drive down the costs of some green technologies. Jigar Shah, director of the Loans Program Office at the US Department of Energy, said we need to find money to take green technology projects down the learning curve. “How do you get [the costs of these technologies] down by 2030 so they can be scaled up in time by 2050?”

Jonah Goldman, managing director of Breakthrough Energy, said we should be giving credit to the people investing in the more blue-sky technologies that have higher risk-to-return profiles, and then focus on scaling up the “money-making stuff” like wind, solar and lithium-ion.

A new type of capitalism is emerging

“Philanthropy can be early risk takers for the climate market, helping to establish innovative models for climate funds, working capital for emerging climate fund managers and climate fintech,” said Marilyn Waite, Managing Director at the Climate Finance Fund.

In essence, climate change requires a new type of capitalism, one which brings the best bits of capitalism—innovation, entrepreneurship, competitive drive—and marries them with activism, Steyer said. “It is a new way of thinking about capitalism, where we're not only measuring returns, but also measuring impact in terms of what we get done.”

We also need to focus on the social aspects of climate change, Reynolds noted. “If we don't bring people along on the transition to net-zero emissions, we're not going to succeed.”

To view the event in full, explore Climate Week NYC 2021 on Facebook Watch.