Ray Dalio, the billionaire founder of Bridgewater Associates, reminded delegates at the COP28 climate summit in Dubai that private capital can only realistically get involved in financing climate solutions if the returns make sense. 

“You have to make it profitable,” he said in Dubai.

It’s a mantra that’s reverberating across the sprawling, sun-filled campus at which this year’s Conference of the Parties is being held, with representatives from Wall Street including JPMorgan Chase & Co. and Bank of America Corp. all underlining the point.

It’s part of a wider pivot in the messaging from the finance industry. Two years ago at the COP26 summit in Scotland, the Glasgow Financial Alliance for Net Zero unveiled commitments it said represented $130 trillion in financial assets. Hailed at the time as a “watershed” moment, bankers at this year’s COP have been at pains to attach conditions to such headline figures.

“You need availability of projects; there may be $130 trillion or more of capital, but it is return-seeking capital, so you need bankable investments that actually provide appropriate risk and return,” Ramaswamy Variankaval, JPMorgan’s global head of corporate advisory and sustainable solutions, said in an interview in Dubai. “That’s what we’re all looking for.”

As it becomes increasingly clear that private capital will need to be deployed in a big way to help fight the fallout of the climate crisis, bankers and investment managers are using the COP28 summit to draw some red lines.

Shriti Vadera, chair of Prudential Plc, said no one should expect private capital to fill a political or policy void without the right incentives.

“Let’s be clear,” she said during a COP28 panel. “The private sector only does things that are commercial and create a commercial return: they are to preserve the capital of their customers, savers, pensioners and depositors.”

Chuka Umunna, head of EMEA ESG and green economy investment banking at JPMorgan, said the feeling is that “some people in our industry have been guilty of overreach in relation to what the role of the banking sector is in all of this.”

And Jason Channell, head of sustainable finance at Citi Global Insights, said that climate pledges alone are “not necessarily what moves the dial. What moves the dial is being able to deploy the capital,” and the concern now is that “there aren’t enough bankable projects,” he said.

In its latest report, GFANZ said some progress has been made as financial institutions have started to take action. The alliance said it’s focused on ensuring that capital flows to where it needs to go around the world.

Given an annual global need of somewhere between $5 trillion and $10 trillion to address the challenges posed by climate change, it’s obvious private capital will need to provide the lion’s share, Dalio said. But there has to be “a return on the money,” he added.

The reality check follows a period of painful losses for green investors. The S&P Global Clean Energy Index is down almost 30% this year, compared with an almost 20% gain in the S&P 500 Index.

Historic levels of support in the form of packages such as the US Inflation Reduction Act haven’t been enough to offset the fallout on capital-intensive green projects of much higher interest rates. 

The investment case in emerging markets is further complicated by the need to compensate private capital for the additional risk of venturing outside the developed world.

Brian Moynihan, chief executive officer of Bank of America, said on a panel in Dubai that climate and energy transition deals in the developing world are “harder to finance,” citing a $500 million debt-for-nature swap his bank arranged for Gabon that took two years to complete.

Moynihan is also among bankers to have warned that US plans to impose stricter capital requirements will make it harder for them to set aside capital for the green transition.

Daniel Pinto, chief operating officer of JPMorgan, said in Dubai that such requirements would leave the bank facing a 25% increase in capital, and “reduce our ability to finance every sector of the economy, and for sure, the ability to finance the green economy.” 

No COP since the annual talks began in the 1990s has hosted as many financial professionals as this year’s summit in Dubai. COP28, which is being presided over by the head of the Abu Dhabi National Oil Company, also has faced more criticism than usual from climate activists who are concerned the event will end up being a venue for deal-making between oil majors and big financial firms. 

Swedish climate activist Greta Thunberg has called the setup “ridiculous.” Prominent financiers, meanwhile, are embracing the moment. 

Jeffrey Ubben, the hedge fund veteran who just closed his sustainable investing firm, said climate summitry has tended to be little more than a green “echo chamber” and that it’s time to bring big oil to the talks. Ubben, an Exxon Mobil Corp. board member, is on the COP28 advisory committee along with BlackRock CEO Larry Fink. 

Umunna at JPMorgan said the change in tone around climate finance at this year’s COP is opening doors to strategies that floundered just a few years ago. 

“We were involved in the discussions around the establishment and evolution of a transition bond label in the debt capital market and it didn’t really take off,” he said. The worry at the time was “that the exercise would be the target of claims of greenwash.”

But now, “I think there is much more of an appetite for discussion around that,” he said.

Another talking point at this year’s COP summit has been the need for financial innovation as a way to lure private capital to the table. Bloomberg News reported earlier that Goldman Sachs Group Inc. is now among banks working on debt-for-nature swaps, which are designed to allow nations to refinance existing debt in exchange for commitments to use the savings on nature conservation. 

When it comes to addressing the climate crisis in the emerging markets, there’s no viable solution that doesn’t include private finance, said John Greenwood, co-head of Americas structured finance at Goldman in New York. But that will require experimenting with new financing structures to make it appealing, he said.

“The focus has got to be on innovation,” Greenwood said.