The money is there, but a new form of capitalism is needed. Can it arrive in time?
This article originally appeared on GreenBiz.com as part of our partnership with GreenBiz Group, a media and events company that accelerates the just transition to a clean economy.
During my recent whirlwind meetings in London, somewhere between the arrival of one “Elizabeth” (Prime Minister Liz Truss) and the departure of another, a two-word phrase kept coming up: “transition finance.” That entails how to fund the necessary transformation of global commerce to combat the climate crisis, the biodiversity crisis and a lengthy list of other social and environmental ills, all while creating an inclusive economy for all.
Transition finance – watch and listen for those words. They are destined to become a critical tool in finance, policy and other circles. In Europe and the U.K., they already are.
Transition finance is “a central focus for us,” an executive at a large institutional investor I met with proclaimed. It’s “the biggest opportunity we see,” a sustainability lead at a major U.K. bank told me. “It’s all our bankers seem to want to talk about,” an executive at another financial institution said. (I’m not identifying these speakers since none of the conversations were on the record.)
The fast-growing interest in transition finance comes not a moment too soon. The world is confronting a “funding gap” of as much as $176 trillion, according to a September 2022 report recently released by Force for Good, a U.K.-based nonprofit focusing on sustainable finance. That mind-boggling sum – far more a chasm than a gap – is what experts say is needed to advance the struggling United Nations (UN) Sustainable Development Goals (SDGs), with the ever-worsening climate crisis – an “existential priority” – sitting high atop the list.
According to a new report, the world is confronting a funding gap of as much as $176 trillion.
And the price tag is rising. The total cost of achieving the SDGs has increased by up to 25% over the past two years, driven by “inflation, funding for net zero, historic underfunding, a persistent gap in official development assistance funding and a shortening window,” the report noted. The growing gap also stems from a confluence of interrelated challenges — the Ukraine war, inflation, supply-chain disruptions and slowing economic growth, among them — as both governments and the private sector redeploy capital to address these more front-burner issues.
Transition finance is not just about bankrolling climate tech, though there’s no small need to bring those innovations to scale. It’s also chiefly about transitioning companies from dirty to clean. Over lunch, one of the world’s largest renewables developers told me that his company’s carbon footprint will increasingly worsen as it buys “brown” assets — think of polluting power plants and age-old factories — and decarbonizes them over time. The company is trying to figure out how to account for all those greenhouse gases in a way that doesn’t pollute its own profile as a global leader.
Policies and politicization
The Force for Good report, produced in collaboration with the UN “and many of the world’s leading financial institutions” ahead of this month’s UN General Assembly, provides a snapshot of finance industry leaders’ engagement across ESG, sustainability and stakeholder engagement in support of the SDGs.
“Global stakeholders are not currently playing the roles required to address the SDGs,” it said. Thanks mainly to the pandemic, the world has not made material progress on the SDGs for the second year in a row. The report also called out “politicization barriers rising in the West,” where “some western nations” are internally divided on ESG, climate change and inclusion. However, it did not specifically call out the United States, most likely the principal “western nation” in question.
Perhaps most significantly, it concluded, “Financiers are limited by client mandates.” The global finance industry’s client obligations ostensibly limit its ability to allocate about $320 trillion of the financial assets they manage “given their perceived mandates, risk, return and regulatory requirements.”
In other words, the needed investments likely don’t meet the standards set by bankers and their shareholders. That’s a problem suggesting those requirements may be out of date – that in a warming, wobbly world, there’s a critical need for new definitions of “profit,” “returns” and “shareholder value.”
Corporations, for their part, have direct control over $60 trillion of gross liquid assets, according to the report. But, it noted companies “are often constrained in terms of their investing flexibility due to their mandates and need to fund the cost of their own business activities with working capital and investments, with only a small portion of their total liquid financial assets ‘invested’ in the traditional sense.”
The extreme challenge requires a system of capitalism suited to transitioning the world to a far superior future.
The report concluded: “The extreme nature of the challenge requires a robust system of capitalism suited to transitioning the world to a far superior future.”
But will that robust system mobilize? Can capitalism meet the moment? Will innovative business models materialize and mature to finance things that heretofore didn’t qualify as viable in today’s capital markets? Can companies deploy their idle capital in a way that meets the needs of people and the planet while garnering shareholders’ blessing in terms of risk and return? How much of the needed capital should be philanthropy as opposed to investable assets that could someday generate income or appreciate in value? What new players – public-private-philanthropy partnerships, for example – will emerge to seize these opportunities?
Such questions are just now being asked, if not answered. The financial institutions I visited in London, plus others I’ve spoken with in North America and elsewhere, are just beginning to eye these opportunities with growing interest. The question is how quickly they can redeploy the same capital that built the extractive, carbon-intensive, linear systems of production that got us here. And in doing so, can they ensure that the fruits of their investments will benefit everyone?
So many questions, so much capital, so little time.
Before I close, an encouraging indicator: The newly ascended King Charles III represents a bright spot among world leaders regarding sustainability, capital and the SDGs. “After billions of years of evolution, nature is our best teacher,” he told world leaders last year at COP26. “In this regard, restoring natural capital, accelerating nature-based solutions and leveraging the circular bio-economy will be vital to our efforts.”
Charles has been an outspoken advocate on environmental issues for more than 50 years and a major funder of scores of sustainability initiatives. He has been hailed as “possibly the most significant environmentalist in history.”
My friend Anthony Zolezzi, a longtime serial entrepreneur who once worked for then-Prince Charles, referred to the new king’s ascension as “the best thing that could happen to the global energy and climate change discussion.” Zolezzi continued, “He is pragmatic, knows the underbelly of all the issues, and will be the first global leader to call out climate change. His passion and vision for what a sustainable world could look like were absolutely mind-blowing.”
Here’s hoping that King Charles will continue to be a fierce advocate, investor and philanthropist for climate, circularity and a more just world.
In that spirit, God Save the King, and the rest of us, too.