What about a climate fund with zero financial returns for investors?

WHAT ABOUT A CLIMATE FUND WITH ZERO FINANCIAL RETURNS FOR INVESTORS?

Michael Molitor

6 September 2021

We are in the middle of a global proliferation in the creation and launch of climate funds of all varieties.  Interest in the climate investment space is white hot and these new funds are betting on their ability to assemble a collection of climate related assets which will collectively outperform traditional benchmarks or generate 100x returns for their investors.  The problem with these funds is that the market doesn’t care about whether the managers can demonstrate that their investments are leading to any meaningful impact on lowering climate risks.  Investors into these climate funds want to meet their risk-adjusted financial return targets and they are happy to tick a box telling their stakeholders that they are responsible investors because they just invested into, for example, a climate equities fund.

None of the climate finance products available today are leading to outcomes which will achieve the key climate objective—reducing both global carbon emissions and the existing carbon in the atmosphere to a level which will maintain climate system stability and allow humanity to avoid the worst impacts.  Today, the climate finance space is all about generating robust financial returns with little or no interest in addressing the climate crisis.  Because there is an almost complete absence of any climate science expertise within the companies selling climate finance products, most of the market participants believe these investments are an important part of the climate solution—nothing could be further from the truth.

Addressing climate change on a magnitude and timescale meaningful to avoiding the worst impacts will require immediate additional investments into global decarbonization of between US$2-5trillion per year.  The current level of climate investments is approaching US$200billion per year—a staggering sum when one considers only a tiny fraction of this is leading to measurable reductions in climate risks.  This observation led me to a thought experiment best described by the title of this post-- WHAT ABOUT A CLIMATE FUND WITH ZERO FINANCIAL RETURNS FOR INVESTORS? If global investors were willing to invest US$200billion per year into climate finance products which gave them a robust financial return but with zero climate benefits, would they be willing to entertain the exact opposite?

I remembered an interview many years ago with eBay founder, and now Chairman, Pierre Omidyar when he described how hard it was to raise venture capital into his startup.  The smartest people in the room, the VC General Partners, said no one would trade goods with someone else on the internet because, at their core, people are not trusting of others—and especially strangers.   Omidyar’s unique insight was that people are more trusting than untrusting and that he could build a global trading platform which would prove it.  The rest is, of course, now well-known.

If Omidyar’s powerful insight were true, and I firmly believe it is, then could we launch a Global Climate Stability Fund where investors transfer capital into the Fund and are never paid a financial return?  The ‘return’ provided by the Fund to its investors is substantially higher than any financial return—even if it were the highest performing fund in history in terms of capital growth.  The value of a stable climate system is at least as big as the total global economy today but with a significant multiple as it also includes all the value not captured and monetized by the global markets. This is the unprecedented return to investors.

The Global Climate Stability Fund [GCSF] would make investments into companies and projects with a focus on delivering the largest reductions in carbon emissions and removals of carbon from the atmosphere as soon as possible.  Climate system stability is best enhanced by large carbon emissions reductions and removals which occur sooner than later—none of the high-profile climate tech funds, including Bill Gates’ Breakthrough Energy Fund, reflect this critical part of the latest climate science.  The GCSF will reinvest all financial gains back into the Fund thereby creating a flywheel effect.  At no point will any of the investors receive any payments from the Fund.

This is not unlike the dilemma which Pierre Omidyar faced when starting eBay—who believes investors will transfer large sums of capital into a Fund which guarantees absolutely no financial returns?  This is the ultimate test of the capacity of capital markets to make investments which can generate substantially more valuable benefits than just robust risk-adjusted financial returns.  If the GCSF is a non-starter then so is our ability to address climate change on the systemic scale of risk at which it exists.  Whether we like it or not, capital markets are both the biggest source of the climate problem and the biggest potential solution.  

Photo by Michael Bryant on Unsplash