Climate Change Investing: How To Fuel Finance For A Greener, Sustainable, Net Zero Tomorrow?

ClimateAngels | Aug 28, 2023

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Could technology innovations and the current state of climate change funding lead toward reversing the adverse effects of global temperature rise beyond 1.5 degrees Celsius (above pre industrial levels). This is causing irregular weather, wildfires, and who knows what’s out there coming for us next?

Based on a Financial Services estimate by Deloitte Center, an added $ 2 trillion in private hardtech investment will likely be needed to effectively slow down the threats from climate change.

Financial services organizations (such as Investment banking firms, Money managers, Brokerage houses, Banks, Lenders, Insurance companies, Tax and accounting firms, Credit card companies, Payment processing companies, Real estate companies, and Fintech companies) can play a leading role in bridging the funding gap for climate financing.

But before you go any further in investing your hard-earned money in ESG (Environment, Social, and Governance) projects, let’s see what challenges climate tech investment puts before you.

The Climate Tech Investment Challenge: What are they?

As the world fights for the impending climate crisis, there are growing efforts to address climate change. It requires more than just good intentions; it demands significant financial commitments and the successful delivery of innovative climate change solutions.

The biggest share of climate funding is expected to originate from the private sector. However, as it stands, there falls short of the necessary funds.

According to Deloitte’s recent estimations, there could be a staggering shortfall of up to $2 trillion in private funding for the advancement of next-generation climate technologies.

The funding gap suggested in the report poses an obstacle to the ambitious target of restricting global temperature rise to 1.5°C, as it stood before the industrial age, by the year 2030.

Despite common beliefs, many “climate hardtech” innovations have likely already overcome the most formidable technical hurdles.

While it’s true that challenges persist, such as the complexities of direct air capture and aviation decarbonization, and the absence of batteries with energy density comparable to current jet aviation fuel, there’s a notable shift towards addressing these issues.

Here are the 5 key challenges to climate change investing:

1. Private Sector Funding Gap – Deloitte estimates a potential shortfall of up to $2 trillion in private funding for next-gen climate technologies, hindering efforts to limit global temperature rise to 1.5°C by 2030.

2. Technical Innovation – Despite challenges like direct air capture and aviation decarbonization, many “climate hardtech” innovations have likely surmounted significant technical obstacles.

3. Pricing Carbon’s Impact – The reluctance of consumers to pay the “green premium” for cleaner energy sources, often due to artificially low fossil fuel prices, can discourage investment in climate tech.

4. Systemic Shift Dilemma – The “chicken and egg” challenge arises when determining who should lead the shift to cleaner technologies: consumers or producers.

5. Early Market Creation – Some organizations are addressing the systemic shift dilemma by leveraging their purchasing power to stimulate early markets for innovative clean technologies.

What factors can discourage or hinder Climate Change investments?

The obstacle to climate change investing lies in the absence of a sustainable business model, often due to the insufficient pricing of carbon’s environmental impact.

Many consumers hesitate to embrace the “green premium,” which represents the extra cost associated with eco-friendly energy sources. Bill Gates aptly observes that clean alternatives can seem more expensive because fossil fuels enjoy artificially low prices.

For instance; green hydrogen, derived from water, may be roughly three times more expensive than its significantly more polluting “Gray” counterpart produced from fossil fuels.

In addition to that, there’s the intricate challenge of figuring out when and how to initiate a systemic transition—the classic “chicken and egg” dilemma. It’s unclear who should take the initial step: consumers or producers?

Some organizations endeavour to resolve this precise quandary by leveraging their purchasing influence to establish early markets for innovative clean technologies.

Are Financial Services Institutions (FSIs) taking the lead?

FSIs are already taking initiatives to support next-generation climate technologies. Their role should continue to expand as they assist in creating a market for climate-related instruments and facilitating project finance and term loans for climate tech projects.

While financial services institutions excel in these areas, there’s still significant potential for them to innovate in financing. They can explore the development of novel financial instruments, such as green deposits and emission reduction–linked bonds, to fund these transformative endeavours, potentially opening up new business avenues.

However, while a substantial part of climate funding is likely required for scaling up and deployment, there remains a critical need to finance climate technologies that have not yet reached commercial viability.

FSIs can provide direct support to early-stage tech startups through equity investments or by offering insurance. It would be on similar footprints how venture capitalists invest in emerging technologies and budding startups.

Success Stories:

Some investors have already demonstrated their commitment to supporting emerging climate technologies:

– Breakthrough Energy Ventures has allocated nearly US$2.5 billion across three funds.

– Just Climate recently surpassed its fundraising target, securing US$1.5 billion from institutional investors, exceeding the goal by US$500 million.

– BNP Paribas’s Solar Impulse Venture Fund aims to invest 150 million euros in American and European cleantech start-ups.

What’s the role of blended finance?

Blended finance is a strategy that combines philanthropic and developmental finance to mobilize private capital. It can be a vital tool for financing challenging projects, especially in developing nations.

Leading private institutions like Standard Chartered Bank, Société Générale, DWS, and Mitsubishi UFJ Financial Group actively participate in blended finance initiatives.

Major global FSIs are increasingly aligning themselves with coalitions like the Glasgow Financial Alliance for Net Zero (GFANZ), committing to align their lending and investment portfolios with green capital expansion. There’s also a net zero coalition from United Nations based on the promises from Paris Agreement for climate change.

How can Green Loans and Green Bonds burgeon Green Finance?

A promising sign of the burgeoning green finance movement is the overwhelming demand for green bonds, surpassing their supply.

In the first half of 2023 alone, green bonds worth approximately US$2.3 trillion have been issued, with US$487 billion raised in 2022. Meanwhile, green loans, often of smaller scale than green bonds and arranged privately, constituted only 2% (around US$10.4 billion) of the market in 2022.

Notably, this year, 70% of loan instruments have originated from the Asia-Pacific and Europe regions combined.

What is the stance of governments and their regulators? Are they ready to lead from the front?

Industry estimates point to approximately 75% of climate funding originating from the private sector. Nonetheless, governments are actively taking part in the transition to a net-zero world through policy interventions and financial measures.

One potential avenue for governments is to address the market’s failure to adequately price carbon, which contributes to the existence of green premiums, albeit partially. Some governments have contemplated strategies like implementing carbon taxes, as exemplified by the European Union’s proposal for a Carbon Border Adjustment Mechanism.

Furthermore, governments can explore alternative policy responses, including tax incentives and direct financial support, effectively reducing the risk associated with private investments.

Notably, the United States has initiated the Inflation Reduction Act, committing over US$400 billion to stimulate the adoption of clean energy, especially in carbon capture and green hydrogen. Separately, the European Union has introduced its ambitious “Green Deal Industrial Plan.”

Moreover, the official sector, encompassing central banks, international organizations, and regulatory bodies, is expected to maintain its active involvement in this domain.

Is It the Right Time to accelerate Climate Change Investing?

Despite the notable progress seen, there is still room for improvement in the efforts of Financial Services Institutions (FSIs) to mobilize private capital for climate technology. To effectively address the looming climate change risks, it’s imperative to bridge the existing funding gap.

Here are some proactive steps that FSIs can contemplate to advance their climate commitments:

1. Mastering Climate Technology: Deepening Understanding for Informed Investment

FSIs must embark on a journey to deepen their understanding of climate technology. This involves educating themselves about the intricacies of this evolving field and gaining insights into potential risks and opportunities.

Establishing dedicated centres of excellence focused on climate tech could prove instrumental in this regard.

2. Pioneering Financial Innovations – Crafting Climate-Centric Investment Instruments:

Leveraging their financial acumen, product expertise, technological capabilities, and global reach, FSIs can pioneer the development of innovative financial instruments.

These instruments should be designed to spread risk effectively, thereby facilitating both the development and deployment of climate technology.

3. Empowering Climate Entrepreneurs – Fuelling Growth through Targeted Support:

FSIs can play a pivotal role in nurturing climate-focused startups by providing them with access to small loans. This support can significantly aid these startups in building their creditworthiness, enabling them to contribute meaningfully to the climate tech landscape.

4. Bridging Information Gaps: Fostering Transparency for Market Development:

Addressing information asymmetry within the industry is crucial. FSIs can contribute to market development by actively sharing valuable information and data related to climate technology. Supporting novel business models that stimulate the creation of markets for next-generation climate technologies is a commendable approach.

5. Elevating Risk Management: Safeguarding Investments in a Changing Climate:

To effectively navigate the challenges posed by climate change, FSIs should enhance their risk management capabilities. This involves expanding their repository of climate-centric information, which enables them to manage the financial implications of climate change on a day-to-day basis. Moreover, this data can yield fresh insights and bolster reporting mechanisms.

By proactively engaging in these initiatives, FSIs can further elevate their role in the realm of climate investing, contributing to a greener and more sustainable future.

What are the 8 key factors to Climate Change Investing?

As a green investor who cares about the mother earth and the future of the planet, here are the eight key factors in climate change investing you must keep in mind:

1. Clear Demand Signals: Governments and companies are increasingly committed to reducing greenhouse-gas emissions, leading to strong demand for climate solutions.

2. Policy Support and Regulation: Governments worldwide are implementing legislation and regulations to support climate and energy transition goals, creating a conducive environment for climate investments.

3. Decline in Green Premiums: Mature climate solutions are achieving cost parity with traditional alternatives, reducing the premium associated with green technologies.

4. Alignment in Capital Markets: Financial institutions and asset owners are aligning around financing the energy transition, pledging trillions of dollars toward net-zero goals.

5. Coalition Building and Ecosystems: Complex value chains require cross-industry collaborations and ecosystems to scale climate technologies effectively.

6. Demonstrated Technology and Operational Performance: Investors look for technologies with credible performance data that replicates real-world conditions, helping assess their viability.

7. Clear Path to Cost Competitiveness: Climate solutions should have a practical path to cost advantages, including learning rate, economies of scale, and design improvements.

8. Ability to Secure Captive Demand: Investment targets should meet near-term customer needs, encouraging offtake agreements and catalyzing partnerships.

Note: These factors collectively play a crucial role in guiding climate-focused investments, helping green investors identify opportunities that align with both climate goals and greater financial returns.

How’s the road to a Greener, Sustainable, Net Zero tomorrow?

As outlined in the 2023 Sixth Assessment Report on greenhouse gases (GHGs) by the Intergovernmental Panel on Climate Change (IPCC), there’s an urgent need for emissions to reach their peak before 2025 and then decrease by 43% from 2019 levels by 2030, and achieve net zero by 2050. It is essential to restrict global warming to the critical 1.5°C threshold.

Recognizing the imminent risk of triggering potentially catastrophic tipping points, closing the funding gap swiftly is of paramount significance. It plays a vital role in the overarching endeavor to curtail carbon emissions. Financial services institutions are uniquely positioned, holding the key to unlock the potential of revolutionary climate technology.

Any innovative climate tech could be the next linchpin in achieving our collective aspiration for a future that is both greener and more sustainable, ultimately realizing the vision of a greener, sustainable, Net Zero tomorrow.