Can finance avert the climate crisis?
An article by Pierre Abadie, Group Climate Director at Tikehau Capital & Co-head of the Group’s Private Equity Energy Transition Practice
Focusing on low-carbon sectors, private investment and global savings will play a decisive role in the fight against global warming.
Just over 30 years after its first findings, the Intergovernmental Panel on Climate Change (IPCC) released the first part of its sixth evaluation report: it is now a given that human activity has warmed the planet. Whatever emissions scenario is applied, Global warming will reach 1.5 °C by the end of the 2030s.
Despite the repeated warnings of the scientific community in recent years, we are starting to accept the reality of global warming, as it unfolds before our eyes. Heatwaves and fires in Canada, record temperatures in Italy of almost 50°C, floods in Belgium and Germany, a hurricane in New York and rain of biblical proportions: summer weather disasters reflect the disruption to the climate and are bound to become more frequent. The way we run our economy has caused the climate crisis. The irony is that the economy will also help us to adapt to it, to control this crisis and resolve it. Decarbonising our economy will help stabilise or even slow the pace of warming.
The path to carbon neutrality is clear. It does not depend on a new technology, new legislation, or a new tax. It depends on reducing the carbon footprint of our system’s existing assets. It requires the insulation of buildings, making our factories more efficient, increasing the number of electric cars on the road, and raising the installed capacity of renewable energy. Yet this transformation will have to be achieved on a grand scale: the International Energy Agency (IEA) estimates that € 4,000bn of annual investment could halve our emissions by 2030. According to the International Monetary Fund (IMF), which also includes the need to adapt our infrastructure to make it more resilient to unavoidable weather-related disasters, investment of between € 6,000bn and € 10,000bn will be required annually.
To finance the needs estimated by the IEA, 3% of the € 110,000bn global savings (which will reach more than € 140,000bn by 2025) therefore needs to be channelled each year into a lower-emission economy - by strengthening the balance sheets of companies that reduce the carbon footprint of others and financing those that strive to reduce their emissions. It is often assumed that the transition will have to be financed by taxes, subsidies, and government debt, yet 70% of the investment will come from the private sector. Institutional finance is the keystone of these vital transformations, much more so than politics or ecology. Finance is a driving force in overcoming the crisis, with the power to safeguard the value of assets. The strategy must focus on tackling the climate emergency over the next ten years while favouring investments that generate value in the short, medium and long term. By way of comparison, the European Green Deal represents € 1,000bn of investment by 2030; in France, the sum earmarked for the ecological transition in the “France Relance” plan is € 30bn. Decarbonising and adapting the economy is the most important structural growth driver of the next decade. This segment alone accounts for 6-10% of global GDP, according to the IMF, and the creation of more than 30 million jobs. The IPCC has rightly been warning us for thirty years, the IEA has mapped out the investments needed to decarbonise the economy, and governments have set up the subsidy and regulatory frameworks to enable the transition to begin.
It is now up to the economy to do its bit. To play their part, companies must ensure the actual transformation of these targets into emission reductions. And within the finance community, it is up to asset managers to act as the fulcrum from which savings are transformed into financing of the decarbonised economy. The direction is known and the goal is clear: to halve our emissions in three thousand days.