How private investors can help combat climate change
With climate talks looming, private investors are in the spotlight. They could make a huge contribution, says Clare Shine from the Cambridge Institute for Sustainable Leadership
Heads of state will soon gather in Sharm El-Sheikh, Egypt for the UN’s latest round of global talks. Such summits are nothing new, but the 27th Conference of the Parties (COP 27) is unique in one regard – the number of private investors set to attend.
Global finance has moved from the sidelines to the centre of climate discussions, a trend that will be on display at the meeting in November. But just how important is the private sector in beating the climate emergency? For Clare Shine, director and CEO of the Cambridge Institute for Sustainable Leadership, its role is huge.
Take Africa. For the continent’s 54 nations to meet their climate transition plans, an extra $1.29tn (about £1.11 trillion) will need to be found between now and 2030. Public funders simply do not have pockets deep enough, says Shine, who describes the recent emergence of investor-led alliances around climate action as “nothing but positive”.
As an example of “important progress”, Shine points to the Glasgow Financial Alliance for Net Zero. Launched ahead of last year’s climate summit in Scotland, the ‘GFANZ’ coalition represents over 450 financial firms with more than $130tn in assets – enough to make government budgets look like petty cash.
The climate clock is ticking, however. As Shine observes: “A lot of people are saying, ‘Show us the progress on delivering that funding [and] how it is actually feeding through into concrete investments.”
The danger, of course, is that the investor presence is branded as ‘greenwashing’. Levels of trust at global climate talks, especially between the industrialised North and the developing South, are fragile at the best of times. Add to this the “growing trend for litigation” among climate activists and investor participation could easily backfire, Shine says.
Time to deliver
Shine’s advice is twofold. First, get delivering. That’s easier said than done, she admits. Climate mitigation and adaptation projects are frequently small in scale and high in risk, two attributes that complicate matters for institutional investors.
Add to this the fact that many such projects will necessarily be found in climate-hit regions in developing countries, and the list of hurdles grows.
“You have high up-front costs, many technical challenges, unproven business models, poor data, currency fluctuation, unpredictable business environment and potential for political upheaval, to name just a few,” Shine notes.
That said, none are beyond the wit of policymakers to fix, she insists. Investment guarantees, credit-risk enhancements, and commitments by public funders to cover ‘first losses’ are just some of the mechanisms available to assuage investors’ fears.
Early precedents are already emerging. Shine points to the Green Guarantee Company. Another product of last year’s COP, this government-backed finance firm acts as a guarantor for climate bonds issued in global capital markets.
An even simpler step is to encourage knowledge sharing. Multilateral lenders like the World Bank have been in the carbon finance game long enough to know how best to structure carbon deals, as well as the loss ratios to expect. There are “typically lower than expected”, Shine notes.
In the spirit of “radical transparency”, Shine calls on public funders to open their books and help private investors navigate a new and often daunting marketplace.
A question of trust
What sounds easy in principle, however, may prove harder in practice. Trust is in short supply. Public finance institutions exist primarily to promote development, not financial returns. Little wonder, then, that the prospect of for-profit investors ‘muscling in’ on climate finance makes some feel queasy.
Shine gets this. A qualified barrister, she has worked in and around the development field for three decades. For this reason, when she says that the public financiers are growing more open to working with their private-sector peers, it carries weight.
“What I am seeing is some multilateral development banks really begin to ask themselves some tough questions about their responsibility and their role for accelerating transformation.”
In this role they will not be funders of climate action, as in the past, but mobilisers of private capital, argues Shine. She is keen not to be misunderstood – this isn’t about public investors stepping back. Rather, it’s about creating a new kind of investment ecosystem grounded in public-private cooperation.
Again, she’s been in the development game long enough to know talk of public-private partnership often covers “a multitude of sins”. Nonetheless, without welcoming private investors into the climate tent, any hope of achieving a climate-stable future is effectively dead.
Such a prospect is unconscionable, Shine insists. “We’re not just talking about global public goods here. We’re talking about human survival. And that means thinking about scale, reach and longevity of future climate efforts. No one institution, no one government, no one region can do this alone.”
Duty of hope
So what’s the ideal message for private investors in Sharm El-Sheikh? First, demonstrate some deliverables. That starts with hard figures on capital deployment, but it doesn’t end there. External observers will also be on the lookout for credible long-term investment strategies and governance measures.
Second, investors should listen and learn. Obvious as it sounds, Freetown is not Frankfurt, says Shine. Seize the opportunity of a climate summit in Africa to discern which investment approaches translate across borders, and which do not.
“One thing that really excites me about COP 27 being in Egypt is the chance it gives us to learn from each other, especially in terms of seeing how people are thinking through a net-zero transition in a region where climate change is really biting.”
Finally, make clear that a climate-secure future is “doable”. Investors, like every other segment of society, have a “duty of hope”, says Shine. Where they differ is having the money to turn hope into action.