At COP26, investors steal the stage from diplomats

On Nov 14, 2021

Weeks of negotiations in Glasgow came to a close Saturday as diplomats agreed to a deal to guide humanity away from a worst-case climate trajectory.

Despite incremental progress, the summit has left activists with little to celebrate.

Every G20 government has failed to meet their Paris Agreement targets, according to watchdog group Climate Action Tracker. A global commitment to funnel $100 billion worth of climate finance from rich countries to poor ones each year has fallen short. The US and China announced a collaborative agenda that, while notable, lacks both firm targets and reliable enforcement.

But behind the political stage, a powerful force is taking shape. The financial world has woken up to the climate crisis and appears willing to supply much of the capital that will be needed to transition to a net-zero economy.

“A paradigm shift has happened,” said Svenja Telle, an emerging tech analyst at PitchBook. “Before, climate finance was seen as a task without returns. It was a sinkhole. Now climate finance is seen as one of the most profitable investment strategies out there. That changes everything.”

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The clearest example of this change came last week from former Bank of England Gov. Mark Carney’s Glasgow Financial Alliance for Net Zero. The group aims to provide $130 trillion in private capital to the net-zero transition by 2050 and is backed by an army of 450 fund managers, banks, pensions and other asset owners.

GFANZ believes that private capital could provide 70% of the $32 trillion in investment needed by 2030 to be on track for a net zero economy by 2050.

That kind of widespread commitment from the largest asset managers is critical to deploying existing technologies, but there’s a rub. Only about 65% of emissions can be eliminated with current tech, according to the Boston Consulting Group, leaving a yawning gap for the world’s entrepreneurs to fill.

Fortunately, the number of climate funds directed at promising new technologies has also blossomed. This week, New York-based VC firm Energy Impact Partners announced a $1 billion-plus vehicle that draws commitments from major US utility companies like Southern Company, Duke Energy and Xcel Energy, as well as Microsoft.

Everyone who’s anyone seems to have a climate fund these days, and private equity giants are no exception: TPG’s Rise Climate Fund raised $5.4 billion in July and is targeting $7 billion, and Brookfield Asset Management has $7 billion in hand, with more to come.

The Bezos Earth Fund has been charged with giving away $10 billion worth of Jeff Bezos’ money by 2030. Among its moonshots are zero-emission ships, methane-spotting satellites and plants that have been genetically engineered to trap carbon underground.

VC funds tend to be smaller than other strategies, but they account for more than 40% of all impact funds raised in recent years, according to PitchBook data. Firms that have closed some of the largest climate-focused VC funds this year include Lowercarbon Capital, which raised a $800 million vehicle, DBL Partners ($600 million) and World Fund ($406 million).

This money is chasing a market in which climate-aligned companies have outperformed the Nasdaq, with a major caveat that many of those gains have been driven by one exceptional company: Tesla. Global investment in climate tech startups has grown five times faster than the rest of the VC market in recent years, according to PwC.

Following its IPO this week, electric truck maker Rivian, which only recently began delivering vehicles, is more valuable than Ford. That’s the same Ford whose F-Series truck has been America’s best-selling vehicle going on 40 years, CNBC reported.

The wave of private investment “totally takes the burden off the underperforming governments in terms of capital flow,” Telle said. Yet more alignment between public and private dollars is needed to ensure a quick transition.

Take electric transportation, which has received more VC dollars globally than any other climate tech segment, according to PitchBook data. That money has sprouted a novel industry, but transportation is only one piece of the decarbonization puzzle. Far more investment is needed in technology to decarbonize areas including manufacturing, buildings and agriculture.

Many of these tasks are too risky or capital-intensive for VC. The Breakthrough Agenda, launched at COP26 this year, is an international effort to make clean technologies in high-emitting sectors cheaper than traditional processes by 2030.

Along similar lines, Bill Gates’ Breakthrough Energy Catalyst initiative has reportedly raised more than $1 billion from corporate backers BlackRock and Microsoft, among others. The money will go toward vital yet commercially unproven efforts in technology like green hydrogen and carbon capture.

If the uptake of electric vehicles and renewable energy has shown anything, it’s that major financial actors can go all-in on cleantech. But government and nonprofit support is needed to remove risk and incentivize the economy-wide transition.

The clock is running down on getting next-generation technologies out the door. We’ll need emerging solutions to be commercially viable before 2030, according to the World Economic Forum. Such a tight timeline requires all actors to be on board.

As Telle puts it: “No sector can achieve this alone.”