Trillion-dollar question: How do we finance climate solutions?
According to a recent analysis by Goldman Sachs, we need to invest another $2.8 trillion per year in climate solutions in order to reach the world’s net-zero emissions goals.
So, what are the mechanisms to shift trillions of dollars into new climate investments? Goldman’s suggestions: “A global carbon price, continued focus on sustainability in the capital markets and improved emissions disclosures from consumer companies.”
These are good starting points, albeit not exhaustive. Let’s look at each of these areas a bit more closely, as well as a few other sustainable finance instruments.
The first item on Goldman’s list: Putting a price on carbon. This idea has overwhelming support from economists across the political spectrum, as well as nearly three in four Americans, according to the Citizens’ Climate Lobby. If you set a price on carbon that increases over time and redistribute those funds to offset the higher prices on energy and carbon-intensive goods, you create an economy-wide incentive for lower-carbon technology. So, what’s holding us back? Millions of dollars from the fossil fuel industry used to lobby decision-makers.
Sen. Joe Manchin (D-W.Va.), the largest recipient of fossil fuel money in the Senate, continues to block a budget reconciliation bill that would invest $555 billion in clean energy. President Biden seems to have completely forgotten about his lofty climate agenda. And the Supreme Court appears poised to limit the Environmental Protection Agency (EPA) and other government agencies’ ability to regulate carbon.
On the bright side, the bipartisan infrastructure bill included $80 billion of clean energy and climate investments.
Perhaps the most promising government activity is coming from the Department of Energy loans office, famous for helping Tesla and other clean energy companies achieve scale. Last week, the agency announced it is providing loan guarantees of over $600 million for green hydrogen in Utah, and battery graphite production in Louisiana.
Local government and green banks
The shining star when it comes to government action is at the state, city and local levels. So far, 23 states have participated in the design or implementation of greenhouse gas (GHG) cap and trade programs. Meanwhile, 14 green banks, with more on the way, are lending capital to get clean energy and climate solution projects built on the ground, like the New York, Connecticut, Washington, D.C. and Montgomery County, Md. green banks.
One of the fastest-growing investment trends is known as environmental, social and governance (ESG). Younger investors are demanding it, and financial institutions are seeing the writing on the wall — investing in fossil fuels is a losing game as industry infrastructure will soon become stranded assets.
Unfortunately, this sector is fickle. Given the current energy crisis in Europe, and record-high profits for oil companies that appear to be price gouging, investors are ignoring their ESG commitments, indicating that they’re often only fair-weather sustainability investors.
You’d imagine that — given the scale of the climate crisis and the speed with which we’re approaching an unlivable planet — philanthropy would be leveling up. I’m sad to report the opposite is the case. Less than 2 percent of all philanthropic donations go to climate action, as if whatever causes comprise the other 98 percent matter in the face an existential threat.
In addition to the ESG funds, individuals, families and foundations are increasingly investing directly in climate solutions. This plays an important role in the investment ecosystem, especially for early-stage companies and technologies, risky ventures and environmental justice efforts that benefit greatly from lower-cost capital.
For example, Creo is a nonprofit investment firm working with high-net worth family offices, aiming to invest a trillion dollars into climate solutions by 2025. We need more groups like this. And we need traditional investors to follow the lead of impact investors and invest in these technologies and companies once the innovation stage concepts are proven.
Credit unions and CDFIs
Another important climate finance solution: community-based lenders like credit unions and community development financial institutions (CDFIs). These groups are increasingly looking to help their local communities decarbonize by investing in solar, energy efficiency and electrification. The nonprofit Inclusiv, in partnership with the University of New Hampshire, developed the Solar Lending Professional Training and Certificate specifically to help credit unions and CDFIs become more proficient solar lenders.
Many of the sustainability trends we see are driven by consumer demand. Electric vehicles (EVs) weren’t popular a decade ago. This year, almost all the car commercials during the Superbowl were for EVs. Non-dairy milk alternatives like oat milk and almond milk now account for 13 percent of the market, thanks to surging consumer demand. Consumer preferences guide the strategies of the companies that make products, as well as the investors who fund them. So, while it can feel trite to “buy green,” when enough people do it, it really does shift markets. “Emissions disclosures,” as the Goldman analysis suggests, could help remind people of the climate impact of their purchases.
Divestment and reinvestment
In the tradition of social movements using boycotts to wield financial influence, climate activist and author Bill McKibben and his organization 350.org spearheaded a fossil fuel divestment campaign a decade ago that moved over $40 trillion out of the fossil fuel industry from over 1,500 institutions including higher learning, religious organizations, pension funds and city and state governments.
To complement fossil fuel divestment, we’re also seeing innovations that allow everyday citizens to invest in climate solutions, including climate-friendly banks like Atmos, online climate investment platforms like Carbon Collective, as well as crowd-investment platforms democratizing finance for climate solutions like Raise Green.
These climate finance strategies, despite their limitations, are beginning to move the needle. If we push hard in each of these areas, we can continue to influence markets, which will put further pressure on our government to act, and hopefully give us the momentum we need to rapidly decarbonize the economy in the fleeting time we have left.
Andreas Karelas is the author of “Climate Courage: How Tackling Climate Change Can Build Community, Transform the Economy, and Bridge the Political Divide in America.” He is also the founder and executive director of RE-volv, a nonprofit climate justice organization that helps fellow nonprofits across the country go solar. Follow him on Twitter: @AndreasKarelas
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