Financial Capitalism to Save the Planet

Massive investments in climate solutions are key to saving the planet from the catastrophic effects of global warming. The Global Financial Markets Association estimates that between 3 and 5 trillion (10¹²) USD per year of investment are required by 2050 to meet the objectives of the Paris Agreement on climate change; the IPCC (UN) calculates 2.4 trillion USD per year. (To dimension such figures, let’s say that Mexico’s GDP for 2023 will be approximately 1.4 trillion USD). The current investment in climate solutions amounts to approximately 600 billion dollars annually, which means multiplying by 5 or 8 the current volume of investment. The resources exist and are available. The bond and fixed-income securities market accumulates assets of USD 128 trillion, with annual issues of more than USD 20 trillion. For their part, global equity markets amount to USD 86 trillion, although annual equity issues are barely USD 1 trillion. Additionally, the private equity and venture capital markets add another USD 500 billion, which could easily reach USD 1 trillion. In other words: the problem is not the availability of savings and investment resources, but public policies, coordination and cooperation between governments, relevant international agreements, the establishment of a price for carbon emissions (through a tax to carbon or Carbon Tax, or carbon markets), and cultural changes and in the preferences and consumption patterns of individuals and families. Various types of assets and financial instruments are put into play to help the gestation and growth of the next unicorns, which will be both digital technologies and the so-called Climate Tech, whose markets have multiplied by 20 in the last decade. These are clean energy, nuclear energy, hydrogen, vehicular electrification, energy efficiency, smart grids, energy storage, carbon capture, vegetable or stem cell “meat”, highly resistant wooden structures, agricultural biotechnology, cement “ green”, and “green” steel, among others.

Venture capitalists look for new businesses at an early stage of development that have outstanding potential for disruption and growth, as well as extraordinary returns in the future, assuming they face very high risks of slow technological and commercial maturation, production scale issues, difficult to market, and high political uncertainty. For their part, it is now observed how private capital funds quickly transfer resources and investments, that is, they divest, in hydrocarbons towards new companies with low emissions, or climate solutions, in order to balance the distribution of risks in their investment portfolios. investment. Stock markets (public capital) offer investors easy access to companies with climate solutions – future winners – based on analysis of markets, technologies, opportunities, management capabilities and risks. Investors in public companies must also assess whether to allocate capital to established existing companies that dominate a certain sector, or to disruptive start-ups that have the potential to become leaders. It should be noted that the quantification and analysis of CO2 emissions of a certain company is somewhat complex, since it is necessary to consider the emissions in its own facilities, its sources of electricity generation, and its customers up and down the supply chain. worth. Another instrument is the creation of special purpose acquisition companies (SPACs), which are public vehicles whose purpose is to directly buy a private company, or specific assets, for example, wind and solar projects that offer a modest but stable and predictable dividend. . Additionally, climate action funds seek investments with low exposure to climate risks, or expressly free of assets from hydrocarbon companies. They can be nurtured by divestment from the fossil fuel companies themselves. Fixed income markets – debt and equity – are well-suited for financing climate solutions with a high initial capital cost. They reach a volume at least ten times greater than the stock markets, and allow relatively low returns, which facilitates, for example, through Green Bonds, the financing of clean energy, energy storage, hydrogen and carbon capture, and others. projects, not to mention, nuclear energy. This market alone exceeds 500 billion USD annually. Finally, the packaging of small projects, for example, residential solar projects, loans or leases, in a single financial vehicle (Securitization), allows them to access debt and capital markets on a considerable scale. Capitalism brought about the industrial revolution in the 18th and 19th centuries, now taking responsibility – literally – for saving the planet.

@g_quadri