At the Intersection of Potential and Need: Finance and Climate Change
It’s hard to escape the discourse on climate change these days. It finally seems to be the talk of the town — as it should be. Too much time has been wasted in the false “debate” of whether climate change is real. It is. So with the narrative finally moving productively forward, let’s talk about an important detail: how on earth are we going to pay for addressing (and ideally reversing) climate change? The answer is actually not so out of reach. There is still immense potential for a just transition to a low carbon economy so let’s take stock of some basics.
The costs of inaction are much too high to ignore.
The United Nations Environment Programme estimates the cost of adapting to climate change is at least $1 trillion per year. With extreme weather events becoming increasingly frequent, the potential losses from storms, floods, droughts, wildfires and landslides are immense. Projected flood losses alone may reach up to 9.4% of global gross domestic product and over 100 million people will be faced with the threat of climate-related displacement. These costs are certainly not only predictions far into the future — in 2017, the island state of Dominica incurred losses amounting to 224% of its GDP from Hurricane Maria. It isn’t alone with facing these ravaging losses.
Even if one could somehow compartmentalise away the economic and human costs — there are also the moral considerations: how about the fact that we may be one of the last generations to witness thriving coral reefs? Or that our consumption addiction of plastic (a product of the booming oil & gas industry) is literally growing an 80 tonne island of garbage in the Pacific Ocean? Or that plastic fibers were found even in the guts of the tiniest animals in the Ocean’s deepest trench? Or that over 1 million species (that’s over 25% of all in existence) are facing extinction due to human activities?
It’s clear: we need change if we hope to break away from this trajectory of self-destruction.
A lot of capital is needed; and the potential for transformational growth is unprecedented.
There certainly are valid arguments about the numerous dysfunctions and failings of the dominant economics systems around the world. And yet, even within these systems, there is potential for growth and transformation. Renewable energy is consistently projected to be cheaper than coal within the next year. Studies show that renewable energy companies are able to offer more jobs per dollar invested.
In a majority of states in the US , solar and wind energy jobs already outnumber coal and gas jobs and are projected to only grow. Additionally, there have been dozens of environmentally concious legislations and policies proposed in recent decades. The most recent resolution in mainstream discourse is the Green New Deal. While there are many facets to consider with it, economists estimate that if it were adopted, 1.5 million jobs would be destroyed while 4.2 million jobs would be created, likely with higher wages.
As of 2016, 1.1 billion of the world’s population are without electricity. And for those that do have access to it, only 8.4% of it is renewable. By 2030, 60% of the world’s population will be living in cities, requiring a tremendous amount of additional energy. And with climate change presenting the biggest threat to development, the additional energy demanded by an increasingly urbanised world population must be provided to as large an extent as possible by renewable energy. This will also help mitigate climate change’s unprecedented impacts disproportionately burdening the poorest and most vulnerable.
The private sector has (cautiously) already started getting involved.
From HSBC to Barclays to Blackrock (the world’s largest asset manager), climate related risk mitigation and investing is becoming a standard offering to clients. Along with sizeable institutions divesting from the fossil fuel industry in their portfolios, investors themselves are looking to put their money into environmentally responsible financial instruments as evidenced by the hockey-stick growth of the labeled Green Bond market.
The growth of the green bond market is an encouraging start, but much more is needed. It cetainly makes sense that the arguably lowest-risk investment option (a bond) is where investors are starting to dip their toes. But if this needed transformation is going to be achieved, risk appetites need to be higher or at least eased into new sectors and geographies.
The graphic below is a helpful visualization of the various facets of climate finance as issued by UNFCCC’s assessment and overview of Climate Finance Flows including the total number of assets under management.
Solutions are on the horizon.
While the realities of the challenges presented by climate change can certainly feel daunting at first, we see them as bringing immense potential for growth and opportunity. An increasing number of actors including politicians, activists, investors and private citizens are trying do right for climate justice. At fettl, we have committed to doing our part too. We are building up an investment and advisory group focused on renewable energy infastructure in emerging markets.
Sustainable development means that the needs of the present generation should be met without compromising the ability of future generations to meet their own needs.
We believe in the development potential that widespread electrification has and that every person deserves the ability to thrive. As discussed in our previous piece, financing renewable energy projects in places with the greatest demand is certainly not without challenges. Still, we are committed to put in whatever it takes to build a prosperous world powered sustainably.
Addressing the risks perceived by investors will take both innovative thinking and bold first-movers who will lead the way for guiding others through this nexus of both need and potential: climate change and finance.
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