Private capital catalyzes sustainable initiatives worldwide. The involvement of private investors, corporations and financial institutions is instrumental in funding projects. The goal is to combat climate change, promote renewable energy and support sustainable infrastructure. These entities offer significant financial resources, innovative financing models and expertise to drive climate-friendly investments and initiatives.
Through impact investing, green bonds, and other sustainable financial instruments, private capital channels funds into projects that reduce carbon emissions, enhance resilience against environmental challenges and promote a more sustainable future. However, in his opening address on the inaugural day of the historic COP28, H.M. King Charles III opined public finance alone will never be sufficient to address the enormous challenge of shifting toward greener energy and adapting to global warming. He summoned the gathering about the urgency surrounding climate change by invoking: “The Earth did not belong to us, rather we belonged to the Earth.”
Gaining new momentum
It is anticipated — even by the most conservative estimate — that the world needs an annual commitment of $100 billion every year to make some headway in realizing net zero goals by 2050. Toward this end, private capital has an enviable opportunity to combine profit with purpose. It has a pivotal role to play in bridging climate finance alongside the government, public finance and microfinance institutions like International Finance Corporation.
The landmark announcement by the UAE, host of COP28, to launch $30 billion heralds a new momentum to leverage private credit. Named Altérra, it will be the largest private sector climate fund in the world, said the UAE. This is in association with BlackRock and Brookfield. Additionally, it has a target to raise finance to $250 billion by 2030.
Read: COP28: UAE President unveils $30bn fund to address climate finance gap
Diverse channels
Private capital can leverage the existing infrastructure in mobilizing funds through a variety of ways including:
Green bonds. Conventional and Islamic Banks have successfully raised funds from discerning investors looking to contribute toward investment projects deemed as climate-affirmative using both conventional bonds and Green Sukuk. Islamic Development Bank (IsDB) has been one of the significant players in this area.
Carbon credit. Poignantly invoked by the MD of the International Monetary Fund (IMF), the agreement envisages a “carbon price” paid by fossil fuel companies to provide investment into green energy creating a significant buffer in complementing public finance.
Thematic funds. Despite criticisms, the growing allure of ESG funds funneling climate-sensitive investors’ funds into green energy funds remains one of the formidable vehicles to achieve the funding gap. Thematic funds aim to merge profit with purpose.
Strategic stake in climate technology. Energy giants like Masdar are playing a major role in supporting the green energy ecosystem through strategic stakes in promising ventures looking at transitioning toward net zero solutions. Strategic stakes in “carbon capture” technology, for instance, have garnered significant attention from stakeholders in recent times.
Private debt via syndication. Even if less popular, private loan syndication enables private lenders to diversify risks through large-scale capital commitment at competitive rates, which is ultimately critical in achieving both size and scale when it comes to clean energy.
Closing the funding gap
The world looks ready to make concerted efforts toward decarbonization and achieve the net zero goal by 2050. And private capital should be seen as an essential harbinger of closing the funding gap. Understanding the key role of academia in achieving sustainability goals, Heriot-Watt University Dubai is also setting aside two floors of its campus in Dubai Knowledge Park as a Climate Hub. It will host visitors from around the world and engage in crucial conversations around sustainability goals.
Educationists, within this landscape, play a crucial role in shaping the narrative and fostering awareness about climate finance. They hold the responsibility of educating future generations on the importance of environmental sustainability. They must also teach the impact of climate change and the role of responsible financial practices in mitigating these issues. Educationists serve as key influencers, empowering individuals to make informed decisions and advocate for climate-conscious financial strategies. Thereby, they are nurturing a generation that values environmental stewardship and embraces sustainable finance as an essential aspect of global responsibility.
Dr. Ullas Rao is an assistant professor of finance at Heriot-Watt University Dubai.
About Dr. Ullas Rao
With a Ph.D. in finance from the University of Mysore in India, Dr. Ullas Rao is an assistant professor of finance at Heriot-Watt University in Dubai. He has more than 12 years of experience in research, teaching, and consulting. Additionally, he is an expert in mergers and acquisitions in the global financial sector. Dr. Rao has made a substantial contribution to finance education. He has also taken part in several seminars and conferences in the UAE and India. He has published widely in recognized publications and led training and consulting programs for major Indian and worldwide companies.
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