November 8, 2018
The Climate Finance Partnership: Mobilizing Institutional Capital to Address the Climate Opportunity
By John E. Morton
First, there is simply not enough public money available globally to make a meaningful dent in our response to climate change. Private capital simply must be mobilized, and quickly, if we are to stand a chance of staving off the worse impacts of climate change. If we fail, the results will be catastrophic.
At the same time, due to rapid technological advances and dramatically falling costs in key industries, we now see compelling and profitable business and investment opportunities in lower-carbon alternatives. Much has been written about the nature and the scale of this economic opportunity. Most recently, the New Climate Economy estimated that bold action on climate change would result in incremental economic opportunities of $26 trillion and 65 million new jobs, that wouldn’t exist with a business as usual approach, between now and 2030.
But if the opportunities are so great, why isn’t capital flowing on its own? One answer is that it is flowing, just not fast enough. Another answer is that institutional capital is famously conservative and suffers from a planet-threatening case of high-carbon habitual behavior syndrome. In this explanation, it needs a swift nudge in order to “see the light” and expedite its shift toward the growing opportunities in more climate-friendly alternatives. Both answers are correct.
Nowhere is the investment gap between what is needed and what is currently flowing greater and more urgent, or the opportunities more significant, than in the world’s developing and emerging markets. These economies are generally characterized by growing populations, rapidly increasing energy demand, and extraordinary infrastructure investment needs. But they also tend to have less developed capital markets and higher political and regulatory risk than their developed country counterparts. Institutional investors may therefore be partially forgiven for moving cautiously, even in the face of compelling long-term economic and demographic drivers.
A detailed analysis by the World Bank found that while $100 trillion is held by pension funds and other institutional investors, these same investors allocated less than $2 trillion over a 25 year period into infrastructure investment in emerging markets. And the fraction of that investment that could be considered green, clean, or climate-friendly was negligible.
So, what can be done? Whether you choose to look through the lens of unprecedented challenge or unprecedented opportunity, there is violent agreement that institutional capital needs to be “unlocked” (a favorite word on the climate conference circuit) and mobilized quickly and at scale.
Blended finance, or the strategic deployment of public or other concessional capital to de-risk institutional capital investment, offers one compelling answer. Recently, the Blended Finance Task Force, a broad-based interdisciplinary effort, finalized a comprehensive report identifying key barriers to large-scale institutional capital mobilization toward the Sustainable Development Goals, and then subsequently designed a detailed Action Program to address these barriers.
Efforts to blend capital in order to engage and mobilize large-scale institutional capital toward climate solutions took a notable step forward on September 26 at the One Planet Summit in New York, when French President Emmanuel Macron and BlackRock's Larry Fink announced the Climate Finance Partnership (CFP). The CFP consists of a unique combination of philanthropies, governments, institutional investors, and a leading global asset manager. The parties, including BlackRock, the Governments of France and Germany, and the Hewlett, Grantham, and IKEA foundations, have committed to work together to finalize the design and structure of what we anticipate will be a flagship blended capital investment vehicle by the end of the first quarter, 2019.
The partnership, coordinated by the Task Force on Philanthropic Innovation and the Aligned Intermediary, an investment advisory group, was designed and structured specifically to use a layer of government and philanthropic capital to maximize private capital mobilization toward climate-related sectors in emerging markets. Doing so in partnership with the world’s largest manager and its set of world-class institutional investor clients should send an important signal to fund managers and institutional investors alike that there are profits to be had in sectors and geographies where this capital has not historically deployed.
The transition to a global low carbon economy represents the most predictable and most consequential economic transformation in human history. Renewable energy, widely considered a niche industry less than a decade ago, now consistently outpaces fossil fuel energy in terms of annual new generation capacity added globally. The internal combustion engine, which has reigned supreme for over a century, surely sees the ominous writing on the wall now that nearly 40 percent of the world’s population lives in countries that have established specific dates by which they will ban its existence. In short, industry is moving, and much faster than most people realize. But just not fast enough.
Efforts like the CFP are nudging mainstream institutional investors to move into climate-related investment sectors in emerging markets. We should cheer its creation and follow its progress with the combination of support and hope that befits the size of the problem and opportunity it is seeking to address.
John E. Morton is a senior fellow with the Atlantic Council Global Energy Center. You can follow him on Twitter @johnemorton