Private capital plays a key role in climate finance, the term generally used to describe finance for activities that help decelerate climate change. This means private investments have the opportunity to decrease the production overheads of important climate technologies compared with their output, while also accelerating the ability of said technologies to scale.
In this article, we will take a look at what climate finance is and how private equity (PE) firms and investors can play their part. We will also share tips on how to move forward to ensure COP26 emission reduction targets are met.
What is climate finance?
Climate finance refers to local, national or international funding that aims to support mitigation and adaptation activities to address climate change. It can be drawn from public, private and alternate sources of funding.
COP26: private climate finance and the role of investors
Organised by the UK and Italy, the 26th UN Climate Change Conference (COP26) sought to progress the objectives of the Paris Agreement that limit global warming to well below 2ºC.
Climate finance is a key determining factor of success for COP26 that focuses on achieving net zero and alleviating and acclimatising to the risks of climate change. The Global Financial Alliance for Net Zero (GFANZ) declared at COP26 that the $130 trillion of private capital of its participants is committed to changing the worldwide economy to achieve net zero.
How can PE firms and investors contribute to mitigating climate change? According to WWF-UK, private equity managers are in a great position to promote sustainable business practices by actively managing their portfolio enterprises. Moreover, investors are also increasingly encouraging PE firms to do so. Such an approach can generate more value for all stakeholders and decrease the monetary and reputational risks to which they are exposed.
The growing interest in green investments in the UK
Green investments committed towards preserving the environment can include securities, electronically traded funds, mutual funds and bonds. PE firms, corporations, hedge funds, or even individuals can partake in green investments to support environmental protection.
The efforts of UK investors in green investment are reflected in the promising level of support for the UN Principles for Responsible Investment (PRI) programme. There are 642 UK signatories, with £8.8 trillion assets under management. Among these signatories, 72% are investment managers and 12% asset owners. Nearly all principal institutional investors in the UK are PRI signatories that have publically committed to integrating ESG into their investment practices.
The UK has also attained some initial successes in catalysing private capital into climate change initiatives such as UK emission targets. For example, the UK Green Investment Bank (UK GIB) almost tripled the investment in green infrastructure within three years of its formation. Another example is of UK-based green tech startup, Oxwash which has raised €590k via crowdfunding that it plans to invest in adding more 100% electric vans to the fleet.
The UK government is also dedicated to helping developing nations tackle climate change through the International Climate Finance (ICF). Since 2011, it has organised £2.2 billion in private funding for climate change initiatives in developing nations.
It’s essential to ensure that COP26 emission reduction targets are met globally. For this, PE investors have to increase their investment in three areas: climate technologies, renewable energy and natural capital. Investing in these three domains is crucial to meeting emission reduction targets because:
- Climate technologies (including energy-efficient practices) will help reduce greenhouse gas emissions and waste.
- Renewable energy will cut down reliance on fossil fuels that contribute to environmental pollution.
- Focusing on the earth’s natural assets will reduce emissions resulting from deforestation and forest degradation.
By pushing these three investment frontlines, and embracing a persistent and risk-tolerant attitude to revenues, investors can contribute towards an economy that exists in synchronisation with our natural systems.
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