Powering Sustainable Investments

Powering Sustainable Investments

March 31, 2022

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Sustainability & ESG

196 countries have adopted the historic Paris Agreement to reduce global warming and limit the effects of climate change, and more than 130 countries have set or are considering a target of reducing emissions to net zero sometime in this century.

According to a 2018 estimate by the Intergovernmental Panel on Climate Change (IPCC), the world will require USD 3.5 trillion annually in investment to limit temperature rise to 1.5 degrees Celsius relative to preindustrial levels by 2050. This requires massive global facilitation and transfer of technical and financial know-how between countries. The path for mobilizing trillions in green finance will require the State and the Market to align priorities through a public, private, philanthropy, policy, and partnership (PPPPP) framework.

Public: Public capital, both domestic and international, will play a vital role in offering confidence to the private market on where to ‘crowd-in’. As part of the Cancun pledge in 2009, developed countries promised to provide USD 100 billion a year of climate finance to the developing world. According to the Organisation for Economic Cooperation and Development (OECD), climate finance provided and mobilised by developed countries for developing countries totalled USD 79.6 billion in 2019, up by 2 percent from USD 78.3 billion in 2018. More directed support will be required in technology transfer and direct economic transfer of value to the developing world. The Global Climate Fund and Global Environment Facility, two of the largest sources of international public finance, deploy relatively small amounts of capital – these pools of capital need to vastly increase. India’s Union Budget 2022 underscores the intent of the Indian government to mobilize resources for financing India’s green infrastructure by leveraging tools such as sovereign green bonds, production-linked incentive schemes for solar PV, battery swapping policies, etc. Public investments will be required in transitioning and reskilling towards green jobs.

Private: In the race to net zero, private enterprises are expected to take the lead in experimenting with new technologies, with the expectation of a much larger prize if the technology achieves commercial validation. Climate Policy Initiative, a global climate-focused think-tank, estimates that private climate investments increased by 13% in 2019/2020 to USD 310 billion from 2017/2018 with corporations accounting for the largest share (40%). A transition to green requires investors, banks, insurers, and companies to adjust their business models and create sustainable transition plans in managing their portfolio. Green finance from private sources can leverage multi-fold commitments from public sources. In 2020 alone, investors poured nearly USD 500 billion into climate transition. Renewable energy and electrified transport dominated these investments.

Philanthropy: Philanthropic capital, with their long-term nature and an ability to accept lower returns or higher risks, can support the investment needs for early-stage technologies in climate related sectors. Given that the current investments in ‘green’ are essentially around renewable energy and electric transport, there may be lesser commercial capital availability for new technology deployment, especially in hard-to-abate sectors. Philanthropic pools of capital can be tapped to fund important next generation technologies which can deliver the green transition. These technologies are at various stages of development and end-user acceptance, including offshore wind, green hydrogen, and battery storage, and need nurturing to prove their commercial viability. Impact capital from philanthropic sources could absorb initial investment risk for new climate technologies.

Policy: Government policies play an important role in setting national targets and priorities for the economy. The government’s National Solar Mission launched in 2010 has played an important role in reducing solar energy costs leading to large-scale deployment and making India a market leader in solar energy. The success of India’s solar sector can be replicated across a range of new green technologies to support commercial viability. Governments have a wide range of policy levers to jumpstart new green industries ranging from carbon taxes, regulatory standards, tax rebates, research subsidies, offtake arrangements etc.

Spurring policy and business changes to drastically cut carbon emissions can pose significant costs across different segments of the society. To ensure an equitable transition to a sustainable future, policymakers are confronted with the challenge of addressing climate change aggressively enough to meet climate goals without harming communities historically reliant on or employed in fossil fuel value chains. Fair and smart policy-making, clear communication, along with open-minded and solution-oriented consultation will be critical to deliver the promise of a just, green transition and achieve economic objectives of job creation and income generation for vulnerable parts of the populations. Even with the technology and private sector commitment, policy is instrumental in incentivizing behaviour and factoring in social costs for the economy. Policymakers will be required to make informed decisions on the implications of each climate policy with respect to distributional impacts across income and geography.

Partnership: Countries and corporates have come together at an unprecedent scale during COP26 in November 2021. One Planet Sovereign Wealth Funds (OPSWF), a coalition of leading sovereign wealth funds, asset managers, and private equity investors, has been actively committed to growing a body of investment practice that accelerates the integration of climate change issues into management of large, long-term asset pools. Many other private sector coalitions are leading change in their sectors or countries. Indeed, regulators across the world are also coming together to help harmonize standards and taxonomies. The role played by global partnerships and pledges today is more crucial than ever.

To create a global sustainable investment boom, we need all these five aspects of public, private, philanthropy, policy, and partnership (PPPPP) to converge. Together they would become “factors of the green transition” and deep convergence among stakeholders along these five factors will be crucial to address this global challenge of unprecedented magnitude.

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Sujoy Bose



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