A Dam Is Holding Back Net Zero's 'Wall of Capital'

by Alastair Marsh, 11/22/22

The “wall of capital” that was supposedly coming to finance the global energy transition has proven to be more of a dam, holding back most of the cash that was promised.

More than $150 trillion of private-sector assets have been committed over the past 18 months to zeroing out finance sector emissions via the Glasgow Financial Alliance for Net Zero (GFANZ). However, just a fraction of that money has been used to address the growing climate crisis.

To reach net-zero emissions by 2050 and limit global warming to 1.5C, investment in renewable energy sources needs to surpass finance flows to fossil fuels by a factor of four over the next decade, according to research from BloombergNEF. Last year at COP26 in Scotland (which was effectively a launch party for GFANZ), then-UK Chancellor of the Exchequer Rishi Sunak hailed the “historic wall of capital for the net-zero transition.”

But while the assets of GFANZ members are well above the estimated $100 trillion needed for the transition, there are no guarantees the funds will be deployed in climate-friendly ways—either today or in the future.

There are a few reasons why.

First, the assets are tied up in existing investments so there will have to be a process of portfolio rebalancing to shift funds.
Second, while bankers and policymakers talk up so-called concessional or blended-finance structures, progress has been slow. Among the proposals have been deals in which public-sector entities provide guarantees or remove some risk associated with allowing private-sector investors to devote large sums to emerging economies where funds are needed most.
Third, financial sector investors say there simply aren’t enough projects suitable for investment.

This third claim was assailed in a new report published by the two leaders of the United Nations’ Race to Zero campaign. The report, issued for “finance day” at COP27, said developers of clean energy and climate-friendly projects—especially those in the emerging world—are ready to go. But they are “struggling to secure investments from potential financiers,” while would-be investors “criticize a paucity of investable projects.”

A series of investor forums were convened between August and October to demonstrate the existence of a meaningful pipeline of investable opportunities. Despite the financial industry contention that there’s nothing to spend money on, the forums came up with more than 100 projects that require $120 billion of financing.

To make the point more forcefully, an extended compendium of projects highlighted prospective investments from El Salvador to Uzbekistan. They include an $800 million crop-adaptation project in Egypt’s Nile Valley and Delta; a $7 billion bio-refinery deal in Panama; and the $5.8 billion financing of what will be Nigeria’s biggest power plant, a hydroelectric facility being developed on the Dongo River.

It’s worth noting that blended finance was a key topic last week at COP27 in Sharm El Sheikh, Egypt. And GFANZ announced last Tuesday that some of its members will support a so-called Just Energy Transition Partnership to provide $20 billion of funding—half from public sources and the rest from the private sector—to assist Indonesia in reducing fossil fuel use and ramping up renewable energy.

This is just a drop in the bucket given what’s needed, though it could provide a high-profile test case of how bank finance really can accelerate the transition.

For Mark Carney, the former Bank of England governor who co-chairs GFANZ (along with Michael R. Bloomberg, founder of Bloomberg News parent Bloomberg LP), focusing on potential investments is definitely the right approach. In an interview at COP27, he said investors should be looking at a different “wall.”

“The smart money” is following “an absolute wall of opportunity in just rolling out clean energy at scale,” Carney said.

Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

A Dam Is Holding Back Net Zero's 'Wall of Capital'

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