After a 40 year legal career in private practice in corporate finance, I have learned the importance of being practical and staying focused on getting the deal done.
I graduated from college in 1970 – the year of the first Earth Day – and went straight to law school to become a corporate lawyer. 46 years after that Earth Day, I will graduate with a Master’s degree from Yale University’s School of Forestry and Environmental Studies, and I will start doing the work that I talked with my friends about in 1970, but did not do. I am beginning a new career in climate finance to work on mobilizing private capital to support clean energy investments. So, why now?
The world needs to invest a huge amount of capital in clean energy infrastructure in order to meet a goal of limiting global warming to 2°C above pre-industrial levels. The World Economic Forum’s 2013 Green Investment Report estimated that to meet this goal, an additional US $0.7 trillion is needed in annual investment on infrastructure in power, buildings and industry, transport, telecommunications, water, agriculture and forestry, above the US $5 trillion annually required to support global growth under business as usual. The International Energy Agency, in its 2014 Energy Technology Perspectives, puts the total of additional investment needed to decarbonize the energy sector by 2050 at US $44 trillion. Those are very big numbers.
How are we doing against these targets? We have a long way to go. Climate Policy Initiative estimated 2013 global climate finance flows at US $331 billion, down US $28 billion from 2012. Around 40% of this was public and donor capital – grants, concessional loans and guarantees, etc. It is unlikely that we can expect public and donor capital to increase to a 40% share of the much larger annual spending that the World Economic Forum and International Energy Agency project is needed. The Green Climate Fund struggled to reach its target of US $10 billion in initial commitments, which at the moment are only one-time commitments. And the larger goal of the Copenhagen Accord to mobilize US $100 billion annually by 2020 to address the mitigation and adaptation needs of developing countries, and which is contemplated to include private as well as public capital, is far from being realized.
The investment capital needs to come from the private sector. For that to happen at the scale needed, private capital sources need to conclude that the risk/return profiles of clean energy investments are at least as attractive as alternative places to invest capital. That means that we need to address two broad kinds of de-risking issues:
(1) Clean energy projects differ from traditional fossil fuel projects in their capital and cash flow characteristics, technology and commercial risks, and project size relative to transaction costs. These differences are perceived by financing markets as making clean energy investments riskier than fossil fuel investments.
(2) In many countries, particularly in the developing world, the enabling environment is unfavorable to investment, for example, because of uncertainty about enforceability of contract, stability of government policies, stability of currency, etc. Private capital generally is unwilling to assume the risks associated with these factors, and the presence of these risks also increases the return on investment that private capital requires.
I will talk about these issues in more detail – and possible ways to overcome these issues – in later posts.
But beyond the risk/return profiles needed to attract private capital, what is required in order to mobilize the scale of capital that is needed from the private sector, is to mobilize a whole new cadre of people to make it happen. And this brings me back to what I learned in 40 years of law practice. We need people who know how to cut through bureaucracy and get deals done. People who recognize that time is not our friend, that we don’t have endless time to debate. And so I am embarked on a new career, to add what I can to the effort to mobilize the capital needed to shift the trajectory of emissions from energy use to one that will allow us to limit global warming to a manageable level.
Larry is currently a 2016 Master of Environmental Management candidate at the Yale School of Forestry and Environmental Studies, focusing on clean energy and green growth finance. Prior to returning to school at Yale, he practiced law in New York City for 40 years, primarily in corporate finance. Larry is a graduate of Princeton University (Woodrow Wilson School of Public and International Affairs) and Harvard Law School. He is Chair of the Board of Directors of InsideClimate News, a Pulitzer Prize winning online publication devoted to climate and energy issues. Stay tuned for more blogs on climate finance from Larry on the Asia LEDS Partnership website.