Clarify what you can and cannot do with finance

Energy transition and the world’s commitments at the UN’s COP28 summit, even though all discussions on sustainability have taken a backseat while other issues (inflation, interest rates, AI, geopolitics, etc.) have taken center stage. How this will be implemented continues to be a focus of attention. This week’s conversation at Davos will be at the heart of the conversation. But that conversation has been going on since the World Economic Forum Annual Meeting just a few years ago.

Many of the technologies and innovations needed to accelerate the energy transition are already in place – think renewable energy, electric vehicles, battery storage and energy efficiency. And other technologies are following close behind, with advances in areas such as carbon capture, green hydrogen and ammonia. . Despite the difficult conditions in capital markets, interest rates and high inflation last year, private markets are pivoting to the investment opportunities these developments create. Nevertheless, even larger fiscal expenditures are still needed to advance these technologies at a pace that will meet global climate goals.

But while some may have been guilty of giving the impression that finance could ‘drive’ and ‘enable’ the transition in the early days of Davos, this has been replaced by a more frank assessment. : Capital is just one piece of the puzzle for unlocking deeper bonds We need to be clearer about what finance can and cannot do toward decarbonization.

Financial providers like banks (I also work for a bank) should support the transition by providing and facilitating the necessary funding, as the green industrial revolution presents significant potential commercial opportunities for customers and financial institutions. It plays a profound role. According to estimates by the International Energy Agency, the energy transition will require an annual investment of more than $4 trillion worldwide, and has the potential to fundamentally transform the energy system at a level not seen since the first industrial revolution. It is suggested that there is. Providing financial services to businesses that seek to take advantage of the intersection of opportunity and need is profitable, fosters innovation, revitalizes manufacturing and supply chains, and provides society with abundant jobs. can create opportunities.

Like all sectors, we too need to reduce our own environmental impact, and funding companies driving the transition is a key element of this.

While finance itself is essential, and indeed many investors and capital providers are already seeing significant returns from more mature transition technologies, it may be tempting to think of capital flows as simply “turning on”. I don’t know. However, he has two main reasons why this is not the case.

Implementing government policy is essential

Supportive government policies will absolutely help ensure a successful orderly transition that generates economic growth, maintains energy security and mitigates the global impacts of climate change. To transform the energy mix, foster new industrial activity, and build sustainable infrastructure at speed and scale, governments must take the lead by setting the necessary regulatory frameworks and policy incentives to support local economies and We need to transform local economies, retrain the global workforce, and unblock greenfield development permits. Required infrastructure etc.

With the right incentives and investment opportunities, capital will flow into the technology you need. As an example, in the United States, the Inflation Control Act (IRA) has helped improve the economics of many technologies. Existing public policy support and Green Deal industrial plans are having a similar impact in Europe, with the relaxation of state aid rules allowing similar support to companies across the EU.

Tough policy interventions, such as industrial strategies, carbon prices, subsidies and market-based incentives, can be game-changing if implemented well. It may also be needed to make the transition economically viable for businesses across the economy and to ensure coordinated progress.

Public guarantees and public instruments also play an important role in attracting private capital, giving investors the certainty they need to put money into long-term, capital-intensive projects. Enhancing risk sharing through public-private partnerships, where governments are ready and willing to provide the initial support needed to scale new technologies, would also make a big difference.

The bottom line is that without the necessary public policy intervention, insufficient capital will flow into the innovative technologies and industrial activities that are needed.

Green projects must achieve good rates of return

Second, financial institutions have an obligation to generate sustainable revenues and serve the communities in which they operate. Many banks are looking to seize the significant opportunity that exists to work with companies that choose to pursue their own low-carbon goals as a business decision. At the same time, we ensure that new risks posed by such activities are appropriately managed.

Allocating large amounts of capital to new energy sources without an established customer base can result in long lead times before the investment returns capital. Another example is the large gap in sustainable infrastructure across emerging economies, yet projects are unable to secure financing due to poor project preparation or sovereign and currency risks. often struggle with.

As hedge fund manager Ray Dalio said at COP28, private capital can realistically play a role in financing climate change only if the returns make sense: “We have to make a profit. It must be done.”

Capital pools around the world are therefore increasingly focused on sustainable outcomes, aiming to combine impact with superior returns. and innovative finance, such as the UAE’s $30 billion climate change investment fund Alterra, announced at COP28 with support from BlackRock, Brookfield and TPG, with support from governments on risk-sharing for green energy infrastructure. The structure is taking shape.

Only through unprecedented collaboration between stakeholders across the public and private sectors can we remove the impediments to decarbonization and create the real economic conditions in which finance can actually support and ultimately accelerate the transition. Masu.

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