Call to action

Energy-transition finance must be sourced from the private sector for projects that catalyse global change

Call to action

Destructive floods, scorching heat waves and violent storms characterised 2023, a year that scientists say was the hottest in human history. With global temperatures soaring by an ave rage of 1.4°C above pre-industrial levels, each new record-breaking event – be it the hottest day or month or fiercest storm – brings immeasurable human suffering and widespread economic losses. Regrettably, 2023 also witnessed a peak in investor disenchantment with green investing. Morningstar reported a withdrawal of $14.2 billion from US sustainable funds in the first three quarters of last year, with $2.7 billion pulled out in the third quarter alone. Reasons behind this exodus varied, including concerns about greenwashing, rising energy prices, high interest rates and a political backlash in the US.

Yet there is a glimmer of hope for a different trajectory in 2024. Marking a historic shift, the 28th UN climate conference in Dubai concluded with a call to transition away from fossil fuels. This represents a significant step forward, even if it doesn’t yet map the precise route scientists advocate. The critical takeaway is that the time for policy talk has passed; we now need concrete action. The question of how to ‘do’ this transition – specifically, financing the move away from fossil fuels – remains a complex and heated debate. Tackling the climate crisis necessitates significant resources, and developed nations haven’t exactly rushed to provide their fair share.

The Intergovernmental Panel on Climate Change estimates that limiting warming to 1.5°C will require up to $6 trillion in annual investment until 2050. While daunting, these figures represent a small fraction of today’s $100 trillion global capital market. The crucial point is this – to achieve the Paris targets, more than half of the needed transition finance must come from the private sector, directed towards bankable projects that drive global change. So, it was heartening to see that COP28 progressed the finance conversation, recognising the critical role of increased financial flows in supporting a climate-resilient future.

Alterra, a climate fund launched by Lunate Capital, aims to bridge the climate financing gap by raising and investing up to $250 billion of institutional and private capital by 2030. It will collaborate with the Global Climate Finance Centre to address barriers to investment in low-carbon projects and facilitate the financial frameworks to overcome them. Outside of COP28, the US Inflation Reduction Act celebrated its first anniversary in August 2023. It’s the largest-ever federal investment in clean energy and emissions reduction in US history allocating nearly $400 billion to initiatives such as tax credits for renewable-energy projects, electric vehicles and energy-efficient homes.

I believe that ordinary investors are considering environmental and social risks tied to climate change as potential investment opportunities. Extreme weather events have highlighted the importance of companies that support enhanced efficiency and resilience in homes and buildings. And, while oil, gas and mining companies swing in and out of favour, investing in those embracing the energy transition could be prudent.

In addition, investment opportunities in wind and solar energy and electric vehicles already exist, while batteries and other energy storage technologies are increasingly cost-competitive and offer another promising investment arena. And green hydrogen and carbon capture – while not yet cost-effective – are exciting.

Agriculture also faces risks due to climate change, urging investment in companies that support natural-resource efficiency, resilient infrastructure, food and water security, and sustainable agriculture. Of course, the road to sustainable investing has risks, as any investment does. Identifying companies with sustainable practices, alongside traditional financial metrics, is crucial to avoid situations where companies fail to deliver on promises.

Thus, in the wake of 2023’s tumultuous climate challenges and investor scepticism, I hope and believe that 2024 will emerge as a beacon of promise for sustainable investing.

By Sasha Planting