The growing focus on climate action and decarbonization has put climate finance on the spotlight. This was evident in the series of financial pledges made by governments and corporations alike at COP26 in November 2021. A number of financial institutions committed to reducing fossil-fuel-based investments and increasing the share of clean-energy-based projects in their portfolio. Several private corporations also committed to arresting climate change through impact investing and project financing that aim to reduce GHG emissions. A major influence on climate finance would be the measures taken by private equity firms, which are increasingly aiming to divert funds towards clean energy and emission reduction through their billion-dollar climate funds.
This article highlights the growing interest of private equity players in climate funds globally and their commitment to emission reductions.
What is climate finance?
Climate finance concerns the financial resources and investments needed to address climate change by reducing current and future emissions. It is estimated that to limit global temperature rise to 1.5º C compared to pre-industrial levels by 2050, $3.5 trillion is needed annually. Currently, a large chunk of climate finance is obtained from the $100 billion annual energy transition and climate fund from developed countries, which is spent in developing and underdeveloped countries, in accordance with the pledge made at the Paris conference in 2015. The funding has never met its annual target and is expected to miss the target every year till 2023. Even if this target is met, this amount is minuscule compared to the more than $100 trillion needed by 2050. The amount may seem large, but the science is clear: climate finance has the potential to deliver significant returns and far outweighs the adverse effects and global economic damage that will likely be caused by the lack of investment in emission-reduction projects.
Growing focus on climate finance
The previous few years have seen a rapid expansion in climate and green finance, and this growth is expected to continue. Green, social, sustainability and sustainability-linked bonds make up the majority of the annual issuance of sustainable bonds, which ramped up from $200 billion in 2018 to over $1 trillion in 2021. During COP26, the United Nations Glasgow Financial Alliance for Net Zero, which comprises 450 asset managers, insurers and banks and has a collective asset base of $130 trillion, declared its commitment to invest towards net-zero emissions by 2050. If these commitments are kept, climate change could become the key area of significant financial investments.
Private equity efforts toward climate finance
Assets under the management of private equity firms nearly tripled in 2010-2020 and are expected to double in 2020-25. Hence, the role of private equity firms, which have trillions of dollars in controlled assets, is likely to be paramount for a sustainable and clean future. Private equity firms provide investors several sustainable investment options through their climate funds, which have received significant traction from institutional investors, particularly European and North American pension funds. A series of climate funds have been announced since 2020 by private equity firms, few of which are covered in the table below. This reflects the growing importance of climate finance among private equity firms as well as institutional investors, which are increasingly investing in climate funds while reducing fossil-fuel-based investments from their portfolio.
Completed and announced recent PE climate funds
The way forward
There is an urgent need for climate finance. The amount needed to become net zero by 2050 increases substantially each year as the world misses its climate finance targets. It is estimated that between 2019 and 2025, developing and underdeveloped nations will likely face ~$75 billion shortfall in climate finance if developed nations miss the annual $100 billion target for climate finance.
Gunung Capital, an active PE firm, has a unique approach to sustainability and decarbonization. The company invests not only in clean technologies that have the potential to reduce global GHG emissions significantly, but also in carbon markets and offset projects, which can drastically reduce short-term carbon footprint, particularly for carbon-heavy industries.