Importance of private sector finance

Why private finance is vital for sustainable development

In 2009, developed countries committed to jointly mobilise USD100 billion annually in climate finance by 2020 to support developing countries in reducing emissions and adapting to climate change. Yet the International Renewable Energy Agency estimates that energy transition investment will have to increase to a total of USD131 trillion by 2050. In addition, according to the Climate Policy Initiative, although approximately USD4.8 trillion of climate financing was achieved through 2011 to 2020, to achieve the 1.5 degree Celsius commitment this needs to become the annual spend.

Bridging this gap will require a significant role by the private sector – and not just the multilateral development agencies but also by the business community. At COP26 in Glasgow the critical role of this community was recognised with the COP26 president noting that the fight against climate change “has to be a joint endeavour between nations, civil society and business”.

Indeed, in his speech at COP26, Mark Carney, the former Governor of the Bank of England reinforced that he sees Net Zero as the critical infrastructure of the new financial system. “It is about client focus, going to where the emissions are to help get them down. So, companies that have plans in place to reduce the emissions, will find the capital, those who don’t won’t. So highly recommend getting those plans in place”, he explained.

The commitment comes with a pathway by which the companies involved, including most of the major Western banks, must use science-based guidelines to reach net-zero emissions by 2050, and commit to interim goals towards a 50 per cent reduction by 2030, and even a 25 per cent reduction in the next five years.

This means adjusting their business models, developing credible plans for the transition, and then implementing them.

In its report, the Climate Finance Leadership Initiative identified the flow of capital within the financial system and the various roles of private- and public-sector institutions.

As the diagram in this Step alludes to, financing the transition to a low carbon global economy will require a wide range of private sector resources that include both the debt and equity markets.

Commitments at a corporate as well as at a national level will be a key driver in the need to raise additional finance.

In fact the Global Risk survey of 800 leaders across business, government and non-profit organisations taken ahead of the World Economic Forum held in Davos in 2020, found that for the first time in their history, the top five Global Risks of Likelihood were environmental.

These were:

• climate action failure

• extreme weather

• natural disasters

• biodiversity loss

• human-made environmental disasters.

Sustainable Markets Initiative (SMI)

Launched at the 2020 Davos World Economic Forum, the SMI is composed of 500+ CEOs and 47 global organisations working to provide a roadmap for business to move towards sustainable markets. This requires:

o a dramatic shift in corporate strategies and operations

o a reformed global financial system

o an enabling environment that attracts investment and incentives action.

Their stated mission is to build a coordinated global effort to enable the private sector to accelerate transition to a sustainable future.

But there are other drivers.

How Generations Invest – Impact Investing

Millennials play a significant role in ESG investing having contributed USD51.1 billion to sustainable funds in 2020 compared with less than USD5 billion in 2015. And in 2021 investors poured USD69.2 billion into ESG funds. This trend is only set to continue, particularly as more wealth transfers to them. And with 40% of Gen Z saying their investment decisions are driven by “companies with a purpose” as their expected income rises, by some accounts as much as 140% in the next five years, the outlook for sustainable investing looks robust. By 2025, it is expected that around 33% of all global assets under management would have ESG mandates. The longer-term view offered by the International Institute for Sustainable Development sees the market for ESG-mandated investments reaching USD160 trillion by 2036, up from USD30 trillion in 2018.