Private investment key to low carbon future

Reading time: 4 minutes
6 March 2015

LONDON: Private finance can fund the wholesale shift to the low carbon economy that the world needs, an article by an investment expert on the prestigious science journal Nature states.

The comment is signed by Nathan Fabian, CEO of the Investor Group on climate Change Australia and New Zealand – an association of institutional investors seeking to address the financial risks presented by climate change in their investment portfolios. These risks have been recently highlighted by Bloomberg New Energy Finance in its report ‘Global trends in clean energy investments’, which shows how investors are shifting the exposure of their portfolios from dirty industries to low carbon activities.

“If we combine the scientific impetus with the economic benefits of acting on climate change, there’s even less reason to delay action,” underlines Mark Kenber, CEO, The Climate Group. “Action saves money – and inaction costs money. A lot of money.

“The clean economy will grow and will provide opportunities – the winners will be those who attract the most and highest quality investments. Clear policy frameworks that transcend party politics are the key to this.”

At the UN Climate Summit last September during Climate Week NYC, which is organized by The Climate Group, a coalition of leaders pledged to mobilize over US$200 billion for financing low carbon and climate-resilient development. The insurance industry also promised to double low carbon investments to US$84 billion by the end of the current year.

“Those commitments represent just the tip of the financial iceberg,” says Nathan Fabian in the Nature article. “Around US$300-trillion worth of assets is managed globally and more than US$20 trillion of new investment is forecast to flow into the global economy each year.”

The Climate Group, in partnership with Goldman Sachs Center for Environmental Markets, also published last month a flagship study to identify promising off-grid energy business models in India with the greatest potential for scale-up. The report "The business case for off-grid energy in India" highlights the technologies available, key companies, future growth forecasts and potential for social and environmental impact.

The 2 Celsius degree limit

These investments though, are not enough to avoid the likelihood of the “severe, widespread, and irreversible impacts” the International Panel on Climate Change forecasts if we increase global warming above 2 Celsius degree above preindustrial levels. In fact, Nathan Fabian points out the International Energy Agency’s ‘Special Report: World Energy Investment Outlook’, says annual investments in clean energy and energy efficiency must rise from around US$390 billion in 2013 to reach US$2.3 trillion per year by 2035.

But the world’s most innovative leading companies and governments aren’t waiting decades to act. “Forward-looking businesses are already seeing the benefits of their low carbon investments. A 27% internal rate of return on average to be precise, according to a recent We Mean Business report,” remarks Mark Kenber. “Inevitably, economies that moved early are now leading the way. China is the world’s biggest investor in clean energy, spending a record US$89.5 billion last year to account for almost 29% of the world’s total renewables investment.

Another attraction of low carbon investment is pointed out in a separate Nature article, which says more than 80% of global fossil reserves must remain unburnt to stay under the 2 Celsius degree limit – adding further long-term risk for fossil investment. This is one of the reasons banks and investors are divesting from extremely volatile fossil-fuel commodity markets for a more stable and predictable low carbon market.

Private finance

Market tools like putting a price on carbon are also key to sustain the shift to a low carbon economy, but governments need to develop long-term policies and raise awareness about the hidden and long-term costs of a fossil-fuel based economy.

“The role of private finance should be taken more seriously in the international climate-negotiation process,” Nathan Fabian comments. “Financiers should see through short-term policy volatility by backing governments with clear low-carbon policy agendas and making them aware of the consequences of unpredictable changes.”

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