Financing a just transition means mobilising the private sector
Politicians may determine climate policy; regulators may set new industrial standards; but it’s private capital that will ultimately prove decisive in financing a just transition to a sustainable global economy and environment.
With the buy-in of the private sector (both in terms of tacit support and literal investment of capital), it will be possible to mobilise enough resources to close the yawning climate financing gap. Without it, any chance of meeting the ambitions set by individual nations and global institutions will melt away.
A roadmap to mobilise capital towards sustainable development
As the 29th Conference of the Parties to the United Nations Framework Convention on Climate Change takes place, all eyes will be on Baku, Azerbaijan. The world’s most influential leaders and thinkers will engage in an intense series of talks designed to keep our collective response to climate change on track. As ever, COP29 has also encouraged a whole host of further climate-based events and initiatives on its side lines, looking to build on the momentum of the main effort.
A question of scale – private capital is essential to timely climate financing
While the debate regarding the feasibility of the Paris Agreement 1.5°C target continues, climate action (and new climate goals) must be based on unfolding realities in our shared global environment and economy.
Research shows that emerging markets and developing countries (excluding China) will need more than $1 trillion in climate finance per year by 2030, alongside a sevenfold increase in current renewable energy investments. Overall, the climate transition is expected to cost $125 trillion by 2050. However, with various current international climate funding efforts being measured in single billions or merely hundreds of millions, rather than trillions of dollars, it’s clear that
the gap cannot be closed with such instruments alone.
A key estimate from the research shows that even if every multilateral development bank dedicated every
scrap of its available budget to climate financing, collectively they would only be able to cobble together around 4% of the total capital needed. On the other hand, there are $410 trillion of global financial assets held in private hands; committing just 1.4% of this total would be more than enough to close the climate financing gap by even the most conservative estimates.
Mechanisms that can encourage sustainable investment
Climate financing efforts have produced mixed results in 2024 so far due in part to underinvestment by
central banks. For example, the United States is the world’s largest economy but the Federal Reserve only ranks 17th on the latest Green Central Banking Scorecard, which indicates its progress in the development of green central banking.
This is a clear case of mixed messaging; private investors are being told repeatedly that the green revolution is coming, and that they must invest more fulsomely to support it, yet at the same time they see the biggest central banks and public financing institutions flagging in their own efforts. Insufficient clarity inevitably leads to a lowering of investor confidence. The reverse is also true; with a clearer indication of climate financing policy, regulations and specific mechanisms, private sector confidence will grow.
Critical areas of focus will address this current lack of clarity, and will seek to provide policy recommendations that can answer the most pressing questions that private investors are asking, such as:
- How will carbon pricing be addressed equitably, and how will it deliver on the long-held promise
of viable carbon markets? - How will emerging technology help finance fit-for-future infrastructure?
- How will this affect diverse investment portfolios and where will the best future investment opportunities be found?
- What is the future direction of environmental, social and governance standards and reporting?
- And how will this translate into greater clarity on whether an investment is truly green or not?
- How can private sector entities take leadership on climate finance and action? Where do they fit into the public sector’s strategies?
- How can public-private partnerships and blended finance accelerate a coordinated and just financial transition?
In each case, cooperation and coordination of efforts will both be essential for finding an equitable
path forward. Both sectors need to inform and support one another’s long-term strategies for climate transition; pursuing such efforts in a piecemeal manner has, so far, led to a catalogue of missed opportunities and an ever-growing climate financing gap.
The World Future Energy Summit will continue to work alongside both private and public sector entities globally to accelerate climate action at every level. With buy-in from a diverse range of motivated climate actors, these suggestions may spur further progress by forging that collaborative spirit just at the time it is needed most.
