China Carbon Credit Platform

With an annual value of 25 trillion yuan, how to promote the largest capital redistribution in history?

SourceJieMian
Release Time1 years ago

"Climate capital migration is not only the largest in terms of quantity, but also the most complex. Investments are needed in hundreds or thousands of large-scale projects, including mega-offshore wind farms, battery and water electrolysis gigafactories, and more. ”

Fabrice Dumonteil, founder and chairman of France's Eiffel Investment Group, said during a roundtable discussion titled "Climate Finance – The Biggest Capital Reallocation in History?" at the Abu Dhab Finance Week Sustainability Summit on November 30.

According to a 2022 McKinsey report, in order to achieve net-zero emissions, the world must add an additional US$3.5 trillion (about 25 trillion yuan) per year by 2050 to invest in physical assets in energy and land-use systems. This has led to climate finance being described as "the largest redistribution of capital in history".

Climate finance is the financing of the global response to climate change. It has attracted a wide range of investment institutions, including sovereign wealth funds, private equity and venture capital firms.

"From an investor's perspective, this is a once-in-a-lifetime opportunity to generate and deliver strong risk-adjusted returns in the medium to long term. Rishi Kapoor, co-CEO of Investcorp, one of the largest alternative asset managers in the Middle East, said at the same forum. He likened the impact of climate finance on the overall economic landscape to digital disruption.

According to Kapoor, about 70% of the innovations needed to achieve net zero are already available, and what needs to be done now is to translate these innovations into commercially sound solutions, such as lowering prices and accelerating the adoption of these solutions.

In contrast to Rishi Kapoor's optimism is Christopher Hohn, an activist investor and founder of the TCI Fund.

The billionaire bluntly stated that the transformation needed globally would not happen without a massive overhaul of the climate regulatory and tax framework.

"What does it mean when solar projects typically return only 6% compared to government bonds with a 5% return on investment?" said Christopher Horn. The rate of return on solar projects is too low because the use of fossil fuels is not penalized and the premium for green technology has not yet been realized.

Gradualism, he argues, is absurd and that only radical policy changes, such as strict carbon management standards, will be able to address the problem.

Fabrice Dumontet, for his part, pointed out that the real challenge of climate finance compared to large-scale projects is the millions of small investments spread across rooftop PV and every household. The financial system needs to adjust to complete these delicate investments, for example, by institutional investors and local regional asset managers, otherwise the world will miss out on 75%-80% of the energy transition part.

"It's also a way to solve the risk-reward problem. Fabrice believes that most of the money is going to large projects, leaving a funding gap for smaller projects. Therefore, combining small granular assets together will result in very strong returns for investors.

Also arguing that the climate finance structure needs to be restructured is Ron O'Hanley, CEO of State Street. In a speech before the summit, he pointed out that the problem with climate finance is not a lack of finance, but how to mobilize capital adequately and effectively, such as the concept of hybrid finance, which combines multilateral development banks and private capital.

"We are often in a situation where multilateral development banks and sovereign wealth funds compete with each other. Indeed, if different levels of capital can be brought in, MDBs can use their capital and further expand the scale of capital through private capital brought in by sovereign wealth funds. Ron O'Hanley said.

Ron O'Hanley also pointed out that a greener portfolio does not reduce the carbon content of the atmosphere, and that the key way to reduce carbon is to invest in high-emitting industries.

"In the short to medium term, a certain percentage of investment will need to go to sectors such as oil and gas, steel and concrete, as new technologies need to be found to mitigate carbon emissions. Ron O'Hanley called on regulators around the world to stop focusing on divestment of high-emitting industries.

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