Robert Downey Jr and Elon Musk recently announced their plans to take on climate change. Team ulaunch sheds light on different financial paths to tackle climate change.

Q. What has happened?

Hollywood celebrity Robert Downey Jr. is diving into the world of venture capital by announcing the launch of two new investment funds supporting environment solutions – FootPrint Coalition Ventures and Rolling Venture Funds. Recently,  Elon Musk, CEO of Tesla, has announced a $100 million prize for the development of the “best” technology to adapt carbon dioxide emissions to various uses.

Q. What is Climate Change Financing?

Funds or investment ventures initiated to help fight climate change are key aspects of climate change financing. Started by mainly international organizations like the World Bank, private organizations, as well as philanthropists, have begun to develop funds to contribute to the fight.

Climate Financing is channeled by national, regional and international entities for climate change mitigation and adaptation projects and programs.

Q. What is Venture Capital in the field of Climate Change and Sustainability?

It refers to investments by private individuals or groups into emergent startups and companies that are working to address climate change and other environmental issues. Such investors help to rapidly scale up solutions across areas like sustainable agriculture, industrial process efficiency, renewable energy, green mobility, air & water pollution, waste management, etc. Enormous growth potential and sustainability focus of these innovative startups are major factors for attracting such Venture Capitalists. 

Venture Capital investment in Climate Technology increased from US$418 million per annum in 2013 to US$16.3 billion in 2019.

PwC

Robert Downey Jr. FootPrint Coalition Ventures will support companies developing business models and technologies that help address some of the toughest challenges posed by climate change. Currently, it is supporting startups in areas like sustainable fishmeal for aquaculture, sustainable paper, cellular agriculture or lab-grown meat, bioplastics, etc. This can shift the perspective and make changes on a larger scale. 

Similarly, Elon Musk will be partnering with XPRIZE to find and award the best carbon capture technology that helps to extract excess carbon from the atmosphere and safely store it. Capturing carbon emissions that significantly contribute to climate change and global warming is critical. Very little progress has been made on the technology. Thus, a monetary prize incentivises this technology – a dire need to help our planet.

Check out how this Mumbai based startup is capturing factory emissions and converting it into floor tiles.

Q. How is venture capital approach different from climate financing?

Climate financing works towards mitigation and adaptation to climate change but the entities involved are countries/government/other international organizations. Venture capital model is private entity driven and thus offers more freedom. The investment is also made by individuals to very concrete organizations/startups instead of pouring money into a ‘development’ fund for a country.’

Q. What are some other mechanisms for climate financing? 

Impact investment 

The public sector and civil society play a critical role in climate finance. Lately, the private sector and impact investors, in particular, have been showing the path as well.

Impact investment comes under the umbrella of sustainable / climate finance. Impact investments are made with the intention to generate positive, measurable social and environmental impact. Investors actively seek to place capital in businesses, nonprofits, and funds in industries such as renewable energy, basic services including housing, healthcare, and education, micro-finance, and sustainable agriculture. Usually, these ventures align with 17 Sustainable Development Goals laid down by the United Nations in 2013. With the motive of creating social and environmental change, the investor also receives financial returns on the investments made.

Investment firms such as Vital Capital Fund, Triodos Investment Management, The Reinvestment Fund, BlueOrchard Finance S.A., and Community Reinvestment Fund, USA. There are various such ventures in India as well, such as Caspian Impact Investments, Unitus Capital. Aavishkar, Villgro, Acumen and Lok Capital. 

Bono, the frontman of famous British band U2 has been an environmental activist for many years. Bono is diligent with his investments, notably via The Rise Fund, which is an American investment fund managed by his firm TPG. This fund distinguishes itself by its desire to quantify the environmental and social impact of its equity investments, with ambitions to help achieve the United Nations Sustainable Development Goals (SDGs). The investment company recently created Y Analytics, a subsidiary dedicated to research on measuring the impact of investments. 

Bill Gates, another famous personality, is diverting his billions for a good cause. In 2015, he launched the Breakthrough Energy Coalition with some 30 billionaires to promote clean energy innovation. This coalition was extended by a venture capital fund, Breakthrough Energy Ventures, promoting clean technology and sustainable energy.

International climate financing funds

International funds support developing countries to design and deliver ambitious climate action plans known as Nationally Determined Contributions (NDCs). The funds also have an essential mandate to maintain an even balance between mitigation of pollution and adaptation of carbon and other pollutants in their portfolio.

  • The Green Climate Fund, Adaptive Fund and the Global Environment Facility are international funds that support developing countries to design and deliver ambitious climate action plans known as Nationally Determined Contributions (NDCs). The funds also have an essential mandate to maintain an even balance between mitigation and adaptation in their portfolio and to engage the private sector through its Private Sector Facility to mobilize private finance toward low-carbon, resilient investments. (Source: The United Nations)
  • Local and regional development banks also contribute to climate financings such as African Development Bank, European Bank for Reconstruction and Development, and the Bangladesh Climate Change Resilience Fund are a few of many. 
Investment Ventures that Tackle Climate Change
Advantages of Climate Finance

Challenges to Climate Financing 

Even though Climate financing is beneficial to our planet, the different approaches to investing have its cons. 

As has been highlighted by various reports, developed nations are significant contributors to climate change and pollution that results in global warming. Whereas the least developed and developing nations are most vulnerable to the fallouts of climate change. At times, the different stakeholders do not work according to the mutually agreed rules. The rules are framed in such a manner that they do not provide a level playing field for different parties that are involved. 

The more developed nations are able to find and exploit loopholes in the overly complex rules and regulations. They even tend to withdraw from the international agreements, thus denting the effectiveness of collective rules-based climate action. Case in point being US withdrawal from Paris Agreement under Trump administration. 

Climate Change Performance Index 2020
Climate Change Performance Index 2020
By Efbrazil – Own work, CC BY-SA 4.0 – Source

Many investors, as well as banks and companies, continue to underestimate the risks of climate change and are still making short-sighted decisions to expand investment into carbon-intensive assets. One of the primary ways to break the link between greenhouse gas emissions and economic activity is to change the energy supply mix, transitioning from fossil fuels to renewable sources of energy. With the key to sustainability missing in this method of using funds, the intent behind climate financing is contorted. 

Thus, identifying and managing climate risks and opportunities remains a crucial undertaking to advance low-carbon, climate-resilient growth. It is important to ensure that the funds are used for sustainable growth and development only.

Conclusion

With the aspect of sustainability incorporated in economic growth and development, climate financing is an innovative and pivotal step toward building an eco-friendly and sustainable world.

Even though this issue that concerns life on our planet is essential to address, reaching the ultimate goal of sustainability will be a lengthy process. As the funds aim for the building adaptive infrastructure, it does not provide immediate relief to emission reduction or any other sustainable outcomes. The gradual process of constructing adaptive capacities to battle climate change will be a tedious task across the world, but a sliver of hope is at the end of the tunnel if the funds are used efficiently and sustainably.


Researched and Written by Ruhi Nadkarni, Team ulaunch.


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