With a Little Help From My (Fiance) Friends; Let’s Talk Private Capital at COP26
Move over Greenpeace, there’s a new kid on the climate block: the finance bros. While banks, investors, and insurers failed to RSVP to previous climate conferences, they took center stage at COP26, the most recent UN climate summit held in Glasgow. While FWP and most ardent environmental observers view this newfound fervor with a healthy dose of skepticism, the finance world’s participation is a welcome development. The annual costs of mitigation and adaptation is estimated to be well over $500bn annually, possibly exceeding $1tn and, as noted by Secretary Yellen, “private capital will be essential to fill the gap” to meet the COP21 Paris Agreement goals of keeping global warming below 2°C (and ideally 1.5°C).
Leading up to Glasgow, the United Nations Environment Programme (UNEP) estimated that the world was on the path to reach 2.7°C by the end of the century. While progress was made at COP26, even perfect execution of national pledges likely put us at a 1.8°C scenario. Ignoring the incredibly high bar that is “perfect execution,” for those of you thinking that “1.8°C is pretty good,” at 1.5°C the world loses 70–90% of coral reefs, while at 2°C, coral reefs are projected to decline by more than 99%. This is just one example of not only the precarious road we travel, but also the materiality of every additional 0.5°C of warming.
Addressing climate change used to be the focus of largely policymakers, activists, and NGOs, but as the data suggests, we need all hands on deck. Enter the financiers. During COP26, the UN Glasgow Financial Alliance for Net Zero (GFANZ) was announced: 450 financial institutions representing $130tn in assets under management (AUM) committed to reaching net zero by 2050. To give some perspective, this is a scale large enough to generate, by some estimates, $100tn in investments in new technologies over the next three decades. This commitment is not legally binding and oversight from financial regulators including the U.S. Federal Reserve and Bank of England will be crucial to help prevent greenwashing, but only time will truly tell whether these institutions follow through and these commitments actually result in material climate impact. It is worth noting that Chinese banks — the primary financiers of coal — did not join in these commitments.
Aside from GFANZ, COP26 included a number of other private capital announcements. The European Bank for Reconstruction and Development released its plan to double private sector climate financing by 2025. The Natural Capital Investment Alliance from the Prince of Wales’ Sustainable Markets Initiative announced 12 new members and the intent to mobilize $10bn in private capital by the end of 2022. 33 of the world’s biggest financial companies with more than $87tn in AUM committed to stop financing deforestation by 2025.
COP26 was defined by historic wins and potentially devastating losses — from 1,000 universities committing to reach net zero by 2050, to India and China watering down the agreement to end the use of coal. One of COP26’s biggest, and likely legacy-defining, wins is undoubtedly the financial industry’s significant commitments and participation. Regardless of the motivation to step up to the plate — whether it be altruism, incoming regulation from the SEC, IASB, etc., or because the next 1,000 unicorns will be in climate tech — the capital and strong market signals are welcome. As a firm that has been actively utilizing private capital to fight climate change since our inception, FWP knows that getting where we need to go will take all of us, even the finance bros.
Madelyn O’Farrell, Investment Analyst
While India and China are taking the heat for their continued commitment to coal, Australia has also doubled down on its use of the most polluting fossil fuel.
So how does a country actually reach net zero? Turns out we need a lot of innovation along the way. Here are five ideas spurring the transition to a green economy, from coffee bean biofuel to energy grid storage solutions.
Curious about how your home country measures up on its path to net zero? Check out this scorecard tracker! (note: the U.S. is not in the green…)
This newsletter is intended solely for informational purposes, and should not be construed as investment/trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any reproduction or distribution of this document, in whole or in part, or the disclosure of its contents, without the prior written consent of Flat World Partners is prohibited