Is it OK to profit from climate change?

Graph source: Statista 2024

The answer depends on what you think is the fastest way to cut carbon.

July 18, 2024

Environmental progress has traditionally meant sacrifice. If you wanted to help the climate, you needed to emit less, travel less, eat less—and more than likely earn less. These days, however, green seems to really mean green. A new report from the London Stock Exchange shows that the green economy has been growing at over 14% a year, beating every equity sector other than tech, and achieving a capitalization of over $7 trillion. With growth come investors, and the capital needed to unlock the word on every climate activist’s lips: scale.

But perhaps rushing headlong into the free market isn’t the best way to solve problems that originated there. Government action comes with scale built in, and regulations can mitigate the inevitable carbon inequalities. Of course, the public and private sectors can and do work together to fix big problems. But climate change is different: it needs action at a scale and speed without precedent. So where is the best accelerator?

 

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Cash Unlocks Action

 

 

1.  Greed is green. The World Economic Forum estimates that developing countries need up to $4 trillion annually to avert catastrophic change. “Private capital is fundamental to financing the climate fight,” writes Laia Barbarà, its acting head of climate strategy. “If we focus on government action, we would lose out on the amplification that comes from private sector returns,” said John Pimentel, CEO of direct air capture company 280 Earth, at the Bloomberg Green conference last week. “We’re trying to finish the swing started by government and laboratories in the public sector to bring down the cost to a point where private sector capital will participate and make money.”

2.  100 megatons x $100 million. Steve Melhuish runs a climate tech venture build fund called Wavemaker Impact in Southeast Asia. He funds start-ups that he believes can scale to remove 100 megatons of carbon over 10 years, while earning at least $100 million in revenue. In a great conversation with McKinsey, Melhuish talks about early successes, including efforts to reduce methane in rice farming: “We think about it from a two-lens perspective—the usual economic opportunity perspective and the carbon impact perspective. We identified about 50 areas just in Southeast Asia where we believe we could build 100×100 companies.” Statista lists dozens of climate tech start-up unicorns (companies worth over $1 billion), with the global top 20 now having a combined valuation of over $140 billion.

3.  Trillions for the taking. A 2023 report from the Oxford Economics Group suggests that the green economy still has a long way to grow. It pegged the potential at $10.3 trillion by 2050, on the back of big increases in two areas. Renewable power generation and electric vehicles manufacturing, together with their supply chains, could account for $5.3 trillion and $3.3 trillion respectively. Going green seems to be a financial no-brainer—a recent paper from an international team of researchers analyzed thousands of corporate earnings calls and concluded that companies that take concrete steps to respond to climate risk are rewarded by the market; those that don’t are punished.

 

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Policy Is Faster and Fairer

 

 

1.  Beware fickle tech bros. Many companies are big on climate promises and short on delivery. Although a third of the world’s largest companies have set net zero commitments,only 7% are actually on track, according to consultants Accenture. And today’s red-hot market can be tomorrow’s bubble. Consultancy PwC notes that the number of climate tech deals has plummeted in recent years, and that a disappointingly small—and decreasing—share of investment is going to start-ups focusing on the highest emissions.

2.  The IRA is overdelivering. It’s been nearly two years since Joe Biden signed the Inflation Reduction Act. New research from the bipartisan Center for American Progress suggests a higher uptake of its clean energy incentives than forecasted, hopefully enabling the US to hit its target of cutting emissions to half of peak levels by 2030. Economists at the independent non-profit Resources for the Future predict that the IRA will reduce US household’s electricity bills by up to $220 a year over the coming decade. Similar research from Bloomberg NEF suggests the IRA alone will unlock a stunning 100 GW of solar power installations in the next few years—that’s as much as the US has installed in total up to now.

2. Blending public and private money. A significant carbon tax, whether targeting luxury goods or helping the global poor, would be great. But there are other ways that governments can have a swift impact on emissions, without taxation’s political headwinds. Last year, the World Economic Forum proposed “blended finance” methods to mobilize private investment in climate adaptation efforts, where governments and philanthropy currently provide over 98% of funds. These include investment guarantees to enable new infrastructure, and taking the first hit on any equity losses in risky but essential climate projects.

 

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What To Keep An Eye On

 

 

1.  The persistence of degrowth. Even as the green economy expands, some activists and politicians are arguing that any economic growth is inherently environmentally destructive. “‘Green growth’ is not a thing,” anthropologist Jason Hickel told The New York Times last month. This viewpoint iscontroversial to say the least, but does seem to have enduring support, especially in Europe.

2. The rise of the eco-precariat. An expanding green economy needs an increasing cohort of workers, but not all of those jobs are better than their traditional predecessors. This intriguing paper from researchers at the University of Lancaster in the UK examines the vulnerabilities of an emerging “eco-precariat”—carbon counters, species identifiers, GIS mappers, tree planters and others operating in poorly regulated and often poorly paid projects in the global south.

3.  Green beating gold. That the world will experience climate-related stock market turbulence in the future is pretty certain. But buying gold in those circumstances is no longer looking like such a safe bet, according to a team of international economists and the University of Cambridge. They found that green assets are now more effective than gold at hedging market risk, particularly in fossil fuels. “Rising climate risk seems to encourage investment in alternative energy, which leads to an upward demand for green energy, which in turn increases the prices of green energy investments and decreases their volatility levels,” they wrote in the academic journey Energy last year.

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