From September 2011 to May 2012, thousands of protestors descended upon lower Manhattan as part of the “Occupy Wall Street” protests, an embodiment of the frustration and anger Americans felt following the 2008 financial crisis. They specifically called out greed and corruption emanating from the financial services industry into politics. A decade later, it remains a strong sentiment. 58% of voters support increased regulation on the industry. Politicians from Hillary Clinton to Bernie Sanders have proposed varying levels of banking regulation. Simply put, Americans don’t like Wall Street and Americans don’t trust Wall Street.
But, to borrow a phrase from Al Gore, here’s an inconvenient truth: in order to effectively fight climate change, the greatest existential threat to humanity, we must work alongside Wall Street. It won’t be popular, but leveraging the strength and size of the financial industry can fundamentally bolster our global response. And in a situation where the global community only has 10 years to significantly cut CO2 emissions without permanent dire consequence, we need all hands on deck.
Climate change is already having an unmistakable impact on the globe. From fires in California and Australia to a drought in Southwest United States to record flooding across Europe and Asia, natural disasters caused by global warming continue to occur at increasingly frenetic levels. Our global response, however, continues to significantly lag these disturbing developments.
Dedicated American initiatives to combat this crisis began in the Clinton administration with the announcement of the Climate Change Action Plan in 1993, which while largely relying on voluntary participation from industry, placed the issue on the Democratic party’s portfolio initiative on the Democratic docket for decades to come. Most importantly, however, was the start of international cooperation, with the meeting of COP-1 in 1995 and the signing of the Kyoto Protocol in 1997, an initiative that, by many measures, is considered a net positive. The Bush White House took a step backwards, declining to implement the Procotol domestically, and actively attempting to suppress discussion on climate change. In a set of bureaucratic moves that presaged the Trump era, the Administration made efforts to bury reports of global warming and removed portions of a CDC report regarding the dangers of global warming on human health. During the 2008 campaign, Barack Obama proposed a platform of climate change initiatives. In fact, he wrote how climate change was the “epochal, manmade threat to the planet”, a threat where “oceans rise and famine spreads”, rhetoric he largely backed up with action. Obama formulated an agreement with Xi Jinping in 2013 to reduce production and consumption of HFCs, an agreement that stood until the Trump White House. The Obama Administration also created the Clean Power Plan, designed to lower CO2 emissions by power generators, fuel economy standards (CAFE), and signed the Paris Agreement, a landmark international agreement in 2016 — all also repealed by the Trump White House. The Trump Administration pushed the envelope even more on deregulation, proposing sharp cuts to the EPA budget, appointing Scott Pruit and Rex Tillerson, both openly dismissal of climate change, and boosted coal and oil industry protections.
What lessons should we draw from these past 30 years of climate change policy?
- Climate change has proven to be a hyper political issue.
- Any step towards improving climate change has been thwarted by two steps back soon afterwards.
And, therefore, we can’t rely on politics alone.
Here’s where Wall Street can make a difference.
First, private capital isn’t bogged down by the bureaucracy and shifting political expediency of politics. Investors will invest where they can make money, regardless of how unpopular it can be. In the fight against climate change, that is a powerful dynamic for irreversible, radical change. Furthermore, while public funding usually relies on compensation via tax breaks over time, private investment is hard cash now. When it comes to building expensive projects with high up-front costs, cash is king. Private equity and investment remains the most efficient method of disbursing funds to generate impact directly to the companies.
Second, private equity is incentivized, by its very nature, to invest in geographies with the highest growth potential, usually emerging markets with significant populations and high fertility rates. These markets, including countries like Brazil, Russia, India, China, and South Africa, have growing middle classes and discretionary income. More importantly, however, they’re extremely reliant on fossil fuels to fuel this growth. And if their dilemma is between continued fast growth with cheap fossil fuels or slowed growth with new and expensive renewables, no one can blame them for choosing the former, emphasizing the need for foreign direct investment to help nudge them to the latter. The very reason these markets are considered attractive from an investment perspective is the very reason they require serious investment. Incentives are aligned in a remarkable way here and we can capitalize on it.
None of this is to say that politicians don’t matter. Federal and state legislation remain the single most important factor in significant and sustained progress. Joe Biden’s climate platform makes necessary and bold goals towards this end (Governor Inslee, the standard bearer on climate during the primary, called the plan “visionary”). A carbon-free electric grid and higher standards for efficient building emissions is, without a question, the most comprehensive climate change proposal by a presumptive Presidential nominee. It is certainly a substantive step towards climate insulation.
But more than a desire to capitalize on the extraordinary efficiency of private capital, we simply have no other choice.
The World Economic Forum projects that $5.7tn needs to be invested in sustainable and green infrastructure by 2020, a significant portion of which must be implemented in developing countries. However, the Climate Policy Institute estimates that, currently, developed country investments total between $10–20bn. Even with recent commitments from developed nations for a collective $100bn investment by 2020, that only brings us to 2% of our total requirements. Even assuming the entirety of Biden’s proposal is enacted (a very unlikely proposition), that is still only 47%.
The sheer magnitude of capital required to fight climate change is apparent. Even with the most radical of international proposals, there’s a significant financial gap. There’s also a logistical, geographical gap, almost all of the committed public funding is from developed nations for developed nations; a significant amount of the $5.7tn needs to be invested in developing nations. Wall Street can go a long way towards filling both of these gaps. The private equity industry continues to grow its war-chest of “dry powder”, unused cash received from large institutional investors like pension funds and endowments. As of January, private equity funds are sitting on a record $1.5tn of dry powder, more than double the size of five years ago. That is nothing to say of any future capital raises by these funds. And logic holds, as climate change investments continue to present themselves, private equity funds will start investing in those areas with their trillions of dollars in dry powder and new committed capital.
This isn’t just a conversation in a vacuum. We’re seeing private capital step up. In June 2020, Amazon announced the launch of the Climate Pledge Fund, a $2bn fund supporting the development of sustainable and decarbonizing technologies and services. This preceded an announcement of Amazon’s acquisition of Zoox, an electric self-driving car maker, for another $1.2bn. This is all after Jeff Bezos committed $10bn of his net worth towards a personal clean energy fund. Not only will headlines like these attract all sorts of new entrepreneurs and startups, but institutional investors will follow suit as well. To see Amazon make such a significant investment in climate change will help spur other firms and high net-worth individuals follow suit.
While certain aspects of sustainable investments will require the initiative of public funding, like building nuclear power plants or improving electric grids, where costs and regulation remain high and returns are abundantly fraught with risk, projects or companies with high growth potential signal perfect investments for private capital. Thankfully, a lot of our global response to climate change fits in that latter bucket. From production of wind and solar plants to championing electric vehicle production to investing in companies solving the battery storage issue, there’s plenty of opportunity for private investment to step in and fill funding gaps. There’s also an opportunity for the private sector to fix issues that the public sector wouldn’t otherwise.
One such opportunity for beneficial private investment surrounds smart grids and renewable energy.
The electric grid has traditionally been arranged like this:
This was the most optimal way to organize the grid for a long time as society organized around centralized fossil fuel electricity production. But with the advent of renewables, more energy is generated locally and connected directly to those distribution networks, bypassing transmission lines. So, now, our electric grid is increasingly becoming like this:
Here’s the problem — the “interconnections’’ between the distribution networks and these localized renewable energy sources and storage are fragile. Our power grid was built for a linear, unidirectional stream. Now, we’re adding power sources all throughout the grid, both feeding downstream users (consumers or businesses) and upstream purchasers back into the power grid (utility companies). Our distribution networks are getting stressed in ways we never originally anticipated. For utility companies, this means costly physical upgrades are required to keep the grid functional in these new times. Unfortunately, given their relative market power, utilities can pass almost all of these costs (“interconnection costs”) down to renewables projects. These costs account for a significant portion of total project costs and can take months of delays. This issue is largely ignored by public funding, yet remains one of the most critical obstacles in the way towards clean electricity.
Interconnection costs is an example where private funding can make immediate and significant change to better facilitate new renewables projects going forward. In this case, venture capital funding helps grow firms like Gridtwin, who solve this issue via artificial intelligence by aggregating historical interconnection costs data to better estimate future costs before it is too late. Doing so helps speed renewables development, avoids sunk costs, and prevents unnecessary delays.
For all of the benefits that private funding can generate, it hasn’t been without its lumps. The last cleantech “boom” on Wall Street was between 2006 and 2008, when the number of VC investments in the cleantech sector in the United States increased by 137% and deal value tripled. Wall Street funded companies with billions of dollars towards capital-intensive technologies like solar panels. It backfired in a big way — the 2008 financial crisis hit, fracking made natural gas exploration and extraction extremely affordable, and China’s governmental push to own the solar panel industry led to American companies being outpriced and, in the end, outlasted. Companies like Solyndra, championed as the future leaders of American industry, fell by the wayside under these conditions. The years after this initial boom were rough as 44% of deal value declined from 2011 to 2017. But recently, we’ve seen the beginnings of another boom and, this time, more positive trends:
Between 2011 and 2017, cleantech venture deal value declined by 44%. As awareness about the risks posed by climate change continued to grow, investment in startups aiming to solve such problems continued to shrink.
More recent years have hinted at a rebound. In 2018, for instance, cleantech startups in the US raised $7.1 billion in VC, the largest annual sum on record.
Looking at the sorts of companies raising large figures this time around shows how the cleantech market has shifted over the past dozen years. Companies building solar panels and other large-scale infrastructure products are no longer the belles of the ball. Instead, it’s electric vehicle makers such as Zoox. It’s startups such as Rubicon, which is developing a platform to streamline recycling, and Convoy, which is using software to make freight shipping more sustainable and efficient. It’s companies like Indigo Agriculture, which this week raised $300 million in VC — at a $3.5 billion valuation, according to Axios — to fund its crop-sustainability technology.
In short, the “tech” part of cleantech seems more important to investors than ever before.
This time around, Wall Street has figured out the right way to contribute: investing in high-growth, tech-oriented companies optimized for venture and growth capital. Meanwhile, those capital-intensive, low growth industries that are fraught with risk and low returns in private markets are perfect for public investment built around common good, not capital gains. It’s why Biden’s platform includes heavy investments in infrastructure and building upgrades. This time around, we’re starting to even out access to capital across the spectrum of climate change solutions with a strong mix of public and private funding. Looking back at the interconnection example, private investment can help grow a company like Gridtwin to better facilitate and streamline efficiency for developing renewables. Couple that with subsidies and tax breaks from the public sector to encourage new market entrants and, hey, now we’re cooking. Just like that, we’ve turned an albatross into a fast, affordable, and attractive market. Both groups of capital coexisting and synergizing in ways like that have extraordinary potential for the world at tackling problems that otherwise would be too difficult to do alone. They both fill different needs and have different strengths. It’s time to recognize it.
The “Occupy Wall Street” protests were not an anomaly. Wall Street is an unpopular force in today’s society and that will, by all accounts, not change going forward. However, humanity has entered a race for our lives a couple decades too late and government alone won’t close the gap. We have 10 years and we need all hands on deck.
The inconvenient truth is that, in dire times like these, Wall Street is far more useful to the world as an ally than as a punching bag.
