Removing Friction in Climate Finance

The problem with climate finance is not a shortage of finance or opportunity. The real problem is the friction that slows the flow of capital from investors to climate solutions. This friction, created by outdated and overbearing regulations, industry and market inexperience and inertia, spans the globe.

When I started working in this field two decades ago, entrepreneurs (including me) complained that investors weren’t interested in funding companies that fight climate change. Conversely, investors complained that there were simply too few bankable companies. Both were right. In the early 2000s, products designed to reduce greenhouse gas emissions, such as solar panels, were outrageously expensive, more than four times the cost of electricity from natural gas. Likewise, electric vehicles were expensive and lacked the range to compete with gasoline-powered automobiles.

Today, this is no longer the case. Renewables are cheaper than fossil fuels, with the International Energy Agency declaring solar power to be “the cheapest source of electricity in history”. Electric vehicles perform better than gas-powered automobiles, have comparable range, and refuel for a fraction of the cost. But just because low-carbon products are better doesn’t mean climate change has been solved.

Avoiding catastrophic warming, defined by scientists as global warming above 1.5 to 2 degrees Celsius, requires an entirely new global economy, reconfiguring our sources and uses of energy, transport, existing housing stock, agriculture and land use. And it must be done quickly. In other words, the global economy built in the 300 years since the industrial revolution must be rebuilt 30 years from now. Investors responded to the unprecedented demand for capital to create the Industrial Revolution. They have the opportunity to do it again in the age of climate change.

Seizing this historic opportunity will require policymakers in every country to address three sticking points that are slowing the flow of investment capital needed to alter the course of climate change:

1) Rules

Funding for a transmission line to move Canada’s clean hydroelectricity to New York City took 17 years to gain regulatory approvals and is still awaiting final review.

The story in Europe is not much better. In Germany, a country historically a leader in climate change, the construction of new wind farms has come to a halt in the face of new state-level regulations. In many countries, outdated regulations are hampering investment in building energy efficiency, electric vehicle charging stations, sustainable meat substitutes and many other climate-friendly businesses.

The solution to regulatory friction is both less government and more. Specifically, governments at all levels must remove or streamline regulations that impede projects while imposing governmental authority to resolve disputes and limit NIMBYism (those who shout “not in my backyard”). The recently passed Cut Inflation Act encourages low-carbon solutions, but even its political supporters recognize the need to advance “enabling reforms” for the promise of this new law to be realized.

2) Inexperience

Investors rely heavily on their experience, their own and that of market experts, when committing capital. This poses a problem for climate solutions that are relatively new to investors. For example, renewable energy projects have been slow to securitize due to a lack of standards and ratings, reducing the flow of capital to the sector.

Fortunately, investors are beginning to understand how to navigate this new terrain. As I explain in my new book, “Investing in the Age of Climate Change,” five climate-friendly investment strategies broaden investor participation, not just individuals but large institutional investors as well.

3) Inertia

Investing in climate solutions in developing countries is made more difficult by volatile local exchange rates and economic and political instability. These additional frictions have created inertia among investors.

While the UN calls for a sixfold increase in financing for climate solutions in developing countries, real foreign direct investment has declined in recent years. Governments and multilateral institutions, such as the International Monetary Fund and the World Bank, must address this inertia with sovereign risk insurance products to accelerate the flow of capital from investors to low-carbon solutions in developing countries.

These sticking points seem minor in the face of the massive challenge of climate change, but solving them will make all the difference. Products that reduce nearly half of global emissions are already commercially competitive and attractive to many traditional investors. The technologies needed to reduce the remaining half are being developed and are attracting venture capitalists. While the total investment needed to remake the global economy is estimated at $100 trillion to $150 trillion over the next 30 years, an increase of five to eight times the current rate of $600 billion a year, this is quite feasible given the high liquidity of global capital. markets and the ongoing change in the investment community.

The capital exists, as do the business solutions, to avert climate catastrophe. Governments just need to make sure they get online fast enough.

Bruce Usher is director of the Elizabeth B. Strickler and Mark T. Gallogy faculty at the Tamer Center for Social Enterprise and principal investigator of the Chazen Institute at Columbia Business School. He is the author of “Investing in the Age of Climate Change.“Usher is an active investor in many public and private companies that provide climate solutions.