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Private investment crucial to funding a just transition

Urgent investment is needed to help emerging markets make a just net-zero transition and private capital must be part of the answer, according to our recent panel discussion.

Private investors will play a key role in finding the “massive” levels of investment needed for emerging markets to make a just transition to net-zero, sustainability experts at our recent just transition event explained.

The panel discussion What is a ‘just transition’ to net zero and how do we achieve it? followed the release of our Just in Time report, which estimated that emerging markets need USD94.8 trillion to transition to net zero by the middle of the century.

The panel, chaired by GlobeScan chief executive Chris Coulter, also came in the wake of the recent IPCC report on climate change, which said that the current investment dedicated to low-carbon transition is about six times lower than it needs to be.

Jules Kortenhorst, chief executive of the RMI, claimed that drastic action is needed to achieve a just transition that helps emerging markets reach net zero without harming their growth or prosperity.

He said: “The most vulnerable people are in the global south and we need to finance a massive investment effort to make this transition happen. But how we structure that financing is going to be crucial.”

Lina Osman, Head of Sustainable Finance West at Standard Chartered, explained the challenge of transitioning in emerging markets is even greater than in advanced economies.

She said: “These are the markets that will bear the biggest consequences of climate change. At the same time, these are also the markets that rely on conventional energy sources like fossil fuels to drive their growth and economic prosperity.

She added: “With growing populations, this makes the challenge to transition even more difficult. Most of these markets will not be able to fund their own transition, and, if they do, their nations will bear the consequences.”

However, the big question is how we finance the transition. “The way we do that is to not only invest ourselves, and mobilise from others but, most importantly, create markets.” Peter Cashion, Chief Investment Officer and Global Head of Climate Finance in the Financial Institutions Group at the International Finance Corporation, explained.

“Capital markets will allow some of this institutional money to come in to finance that transition. And of course, to do it in a just manner,” he added.

However, it’s the role of private investment that is crucial. According to Just in Time, there is a USD83 trillion opportunity for private investment in emerging market transition.

Cashion believes there is great potential to leverage private investment. He continued: “If we tally up all of the money available from development finance institutions, and we compare that to the amount of funding available from institutional investors, it's one to 900.

“They have 900 times the amount of funding that we do. That's why that institutional investor universe is so important.”

There is a role for the public sector to play in terms of blended finance, according to Kortenhorst. “We talk a lot about it but the number of deals that really mobilise large amounts of private sector capital, on the back of public sector finance that de risk projects rather than finance projects are small,” he said. “How can we triple or quadruple the volume of transactions?”

Are we are starting to see encouraging signs of increasing private investment in net zero? According to the Glasgow Financial Alliance for Net Zero more than USD130 trillion of private capital is committed to transforming the economy for net zero.

Sanna Markkanen, Research Programme Lead and Senior Analyst at the Cambridge Institute for Sustainability Leadership explained: “There is growing momentum among the private sector. Businesses, investors and financing institutions are really looking at investing in just transition and green energy, both in advanced economies and emerging economies.”

She adds: “This is beginning to be seen as an opportunity, not an obligation. And the growing momentum around that shift is really encouraging.”

However, the size of the task is huge, the need for action is immediate and the consequences of failure could be catastrophic. Kortenhorst concluded: “With the urgency and the magnitude of the crisis, there is no doubt that if we do not take drastic steps, the future of life on this planet, for generations coming up, will be dramatically different than the world that we have experienced.”