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Mobilizing Private Capital For Climate Action

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Climate change demands urgent action, and the mobilization of private capital is emerging as a pivotal force in reshaping industries for a sustainable future. While the loss and damage fund was established at COP28, there are not nearly enough public funds and pledges to cover the roughly $2.8 trillion in climate damage already done plus any mitigation or adaptation costs. In the climate change conversation, multilateral development banks (MDBs) are often viewed as the lead financiers. There are a couple of flaws with this assumption. MDBs tend to offer loans as the primary funding mechanism, a process fraught with controversy and questions about its effectiveness. They can hold capital as mortgagors, but often are not experts in higher risk capital investments. On the other hand, private capital organizations have higher risk tolerances and are able to utilize or even design different financing mechanisms. And, quite frankly, there is more private capital available than public funds. At any given point in time, there is roughly $100 trillion on asset management organizations’ books alone.

Foundations As Innovators

Foundations, as custodians of substantial resources, play a vital role in the fight against climate change. Interviews with leaders reveal a strategic shift in capital allocation, focusing on initiatives that address climate challenges head-on. For instance, the Rockefeller Foundation’s commitment to renewable energy projects demonstrates how foundations can drive positive change by redirecting their financial clout. We spoke to two of the leaders of Heading for Change, a foundation that is pushing the moral imperative for rethinking private capital’s role in addressing climate change. They help investors align capital with values with a focus on climate change and ensuring that globally, women have access to resources. Jackie Vanderbrug, a trustee of Heading for Change, spoke of a private capital theory of change that focuses on raising the profiles of women working for climate change, “When you invest in women, you invest in their families, you invest in their countries and you invest in the world.” While there are facets of climate funds and public resources that take gender issues into account, there are opportunities for private capital to make direct connections to discrete climate change issues. It can also be a force multiplier. . “Millions can move trillions,” so the power of the work is in “that ecosystem development.” Samantha Anderson, a Change Weaver at Heading for Change also cautioned that governance also has to be a part of change, advocating for “open source transparency of knowledge.”

Corporations Shift To Promoting Change

Corporations, often viewed as part of the problem, are increasingly becoming agents of change. Some of the work is altruistic. But the majority of the interest in corporations changing practices or funding climate change work is based on shareholder desires. $3.1 trillion in globally traded equities fall under some sustainability or climate related classification. Sustainable funds perform well, “In the first half of 2023, sustainable funds saw a median return of 6.9%, beating traditional funds’ 3.8% and reversing their underperformance in 2022,” according to reporting from the Morgan Stanley Institute. Where performance goes, so does consumer demand for those options. Along with increased demand for green investments, shareholders also have their eye on corporate practices. It is not a coincidence that companies from Google to Unilever are looking at initiatives to reduce their carbon footprint. Within that additional interest and funding lies opportunities to invest more deeply in climate action.

Hedge Funds For Climate Action

Once viewed as risky business, in the last few years hedge funds have shifted towards focusing more on environmental goals. The world’s most profitable hedge fund, TCI Management, made headlines in 2020 when its founding donated billions to climate efforts and began dumping companies that did not address climate change from the fund’s portfolios. Today, having a climate focus is no longer a radical concept. It is a growing value proposition. Barclays bank conducted a survey of hedge fund investors and found that their interest in ESG related funds. “soared from 8% to 30% since 2018.” Not surprisingly, hedge funds are exploring sustainable investments, recognizing both the economic and environmental returns.

What hedge funds can bring to the larger conversation about climate action is risk tolerance and agility. By design, these portfolios contain innovations, higher risk debt, including sovereign debt. Hedge fund managers and investors are accustomed to dynamic landscapes, whereas MDB directors and traditional lenders may not be willing to take on sovereign debt from low-income, high-climate risk countries that are banking on innovations to adapt to climate change.

A mix of the strengths of private capital’s flexibility and ingenuity combined with public institutions’ governance expertise could be the key to funding and accelerating climate action. World leaders have to consider ways to realize the possibility. For their part, private capital leaders should continue exploring the idea that mobilization of private capital is not just a financial strategy; it’s a collective responsibility. Foundations, corporations, hedge funds, and nations all hold a piece of the puzzle, and only collaboration can unlock innovative solutions to the pressing climate crisis.

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