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The world cannot afford a climate finance bubble (I/III)

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By Christopher Caldwell

· 5 min read

Last week I was in Morocco for the 2023 World Bank/IMF Annual Meetings as a guest of the Africa Business School and the Mohammed VI Polytechnic University. I always enjoy these events, which bring together finance ministers, central bankers, executives and civil society to chew over the state of the global system. This year was all about resilience, transformation and global cooperation.

My invitation was to speak at the M6PU Climate Finance Forum on, ‘The Private Sector’s Role and Financial Resilience in Climate Action.’ It will come as no surprise, for anyone who knows me, that I had plenty to say on the matter!

As a representative for the private sector on that panel, I was there to offer a view from the ground. More importantly, it was a rare opportunity (as an entrepreneur) to speak directly to these powerful institutions. And whilst it was encouraging to see climate centre stage, the missed opportunity that was the Paris Summit for a New Global Financing Pact shows we have to do better.

After a lot of thought, I delivered three messages I believe these institutions need to hear if we are to collectively succeed in the climate struggle. In this series I want to share those messages with you too.

This first article looks at the changing landscape of private capital, and asks one very big question: how can we collectively avoid a climate finance bubble?

A transformative decade

Let’s start with the obvious: climate finance has completely transformed in the last decade. 

Twelve years ago, opportunities far outpaced the available stock of capital. Great projects simply went unbuilt for lack of finance. 

Today the world is racing to catch up. Private sector investment alone soared from $549bn in 2020 to $682bn in 2021, and continues to rise. That is fantastic – but it carries risks too.

History is littered with the corpses of ‘the next big thing.’ Every time private capital has flooded into a sector so rapidly, it has brought a loosening of standards, the dilution of expertise, and simple misallocation. People get their fingers burnt. The bubble bursts.

That is something we simply cannot afford. Funding climate change must be a permanent, secular trend. If the bubble bursts into another lost decade, our chances of hitting net-zero in time will pop along with it.

Finding your capital match

We can still chart a safe course through.

In 2010 there were a bare handful of wind turbines in Northern Ireland, and those were mom-and-pop projects on scraps of farmland which were hardly a financial success. Wind speeds were excellent and the government had introduced an attractive new incentive scheme; but land ownership was fractured, parcels were tiny, precedents poor, and both regulators and communities were tricky to handle. As an investment proposition, nobody would touch it.

We saw things differently – and the key was getting the capital matching right.

In such a small, untested market raising debt was impossible, whilst institutional money just didn’t fit the profile. We realised the answer was to source small-scale, high-risk capital and carefully match the tax structure of the vehicle to the government’s new incentive programme, to align risk and unlock value. 

It was a delicate process that drew on all my previous experience in corporate finance. But it worked, and it resulted in the first investment-grade renewable project in the entire country.

The responsibility in greater opportunity

Fast forward to 2023, and sourcing capital for mainstream projects is much easier; but matching the right capital to the right context is as important as ever.

For example, we are currently working on a number of big projects in Scotland. One shovel-ready 350MW solar installation is top of my mind, because the challenge is not attracting capital so much as picking the perfect suitor.

One option would be a virtual Power Purchase Agreement with a Big Tech company like Microsoft. They are decisive, offer great technology co-benefits, and decarbonise actually-existing infrastructure. 

Alternatively, pension funds are now in the game. That would leave us as the Independent Energy Provider selling to grid at market; But it’s a much slower process, and requires intermediate financing as they won’t take construction risk.

Or there are off-grid options. One of our developments is close to a plant that uses a lot of grey hydrogen; we could out-fit green hydrogen and pipe it to this local end-user.

It’s wonderful to have so much more choice. But that comes with responsibility. Simply taking the first or the cheapest, in a rush for volume, risks misaligned expectations, operating friction and sub-standard returns down the line. That is a recipe for a burst bubble.

The questions we need to ask ourselves

So that was part one of my message to the IMF and World Bank last week. Because we cannot afford another lost decade of green investment, we must take every care not just to invest more in climate, but to invest right. Careful capital matching needs to become a core value industry-wide.

For the IMF: how can we better design reform programmes and regulations to promote quality capital matching for climate investment?

For the World Bank: how do we make sure that green development funding is directed not only to the right place but through the right partnerships?

For central bankers: how can we integrate climate investment into systemic stability mandates – without choking it off?

For the private sector: what would it mean to take responsibility for our market’s continued resilience, i.e. to proactively prevent a bubble from forming?

I’ll take up that theme of resilience in my next article. In the meantime, what would your message to these global institutions be? I’d love to hear your view – because our voice is always strongest when we speak together.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.

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About the author

Christopher Caldwell is the CEO of United Renewables, where he employs his past experiences as a corporate lawyer, investment banker, and team leader to lead all aspects of the business. Chris holds a degree in business from Trinity College Dublin, an MBA from London Business School, and is currently reading part-time at the Yale Center for Business & the Environment. 

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