The year may be new, but the old ESG debate is still hanging around. “The backlash” remains a fraught topic across the public markets, where economic, social, and political forces have complicated any discussion of the real-world effects of investments.
That prevailing backlash narrative, however, ignores half the story–a critical half for our planet and its most vulnerable communities–on the heels of the hottest year ever recorded on earth.
The larger truth is this: Throughout the private markets, the consideration of environmental and social impact in investment decision-making is a well-accepted and fast-growing practice. Around the world, private investors are driving meaningful and lasting progress on our most pressing global challenges.
For climate watchers in 2024, the powerful impact potential of private capital holds tremendous promise, as we enter the fourth year of this “decisive decade.” Current climate funding represents only about one-fifth of what’s needed annually to achieve net zero and limit warming to 1.5°C. That gap presents our biggest challenge–and our biggest opportunity.
A new climate investing framework
For allocators of impact-driven capital in the private markets, the urgency of this moment means it’s time to shake up climate investing. Allocators must focus more of their dollars on areas of greatest need and greatest impact–alignment that can be achieved while still meeting investment objectives.
With that focus at the forefront, we suggest a framework of four essential climate investment themes– areas where impact investors are best suited to generate the biggest impact per dollar: climate justice, the energy transition, deep decarbonization, and nature-based solutions.
At present, these themes represent critical gaps: They are both essential to achieving global climate goals and underfunded by traditional capital markets.
They are areas where impact investments–including loans, equity, project finance, and other creative capital structures–can drive meaningful climate progress, alongside community empowerment. And critically, when structured with intention and creativity, these investments can unlock even more private capital for co-investment, creating a multiplier effect that substantially amplifies their effectiveness.
Climate justice
Fundamentally, the goal of climate justice is to address the disproportionate health, environmental, social, and economic impacts of climate change on populations that are most vulnerable to its effects, and groups that have been historically disadvantaged by the status quo energy economy.
This strategy is people-centered and hyper-local–identifying and engaging communities that shoulder outsized environmental burdens, listening to their view of what is most needed, and providing investment capital that empowers the community to transition to a healthier, more resilient state. Investments range from deploying established renewable energy and infrastructure intentionally in underserved communities to workforce and green job programs that upskill and train workers–along with more targeted investments in food and water security, indigenous land stewardship, community agency and ownership models, and natural disaster preparedness and resiliency planning.
Climate justice can also be applied as a lens across other critical gaps, ensuring that equity and people are centered in those strategies and solutions as well. At a minimum, investors are mindful of their climate investments’ impacts and seek to engage adjacent communities. In some cases, investors intentionally place capital exclusively where it can have a catalytic effect on communities that otherwise do not have the means to create change.
Energy transition
Reducing emissions from the energy sector–which alone accounts for more than one-third of global greenhouse gas (GHG) emissions–is critical to mitigating climate change.
To accomplish this, impact-driven capital must help accelerate the equitable deployment of proven renewable energy technology, develop and scale new renewable energy sources, and overhaul our electric grid.
We see a number of green banks and energy transition-focused firms helping to lead scalable deployment, while solar energy providers prioritizing affordability are demonstrating how equity considerations must infuse the transition. A growing ecosystem of green banks is also working to integrate renewable energy alongside climate resilience improvements into low-income communities.
Deep decarbonization
The goal of deep decarbonization is to reduce emissions from the hardest-to-abate sectors, like agriculture, industry, transportation, and buildings & infrastructure. When combined, these sectors account for about two-thirds of GHG emissions.
Impact investors can provide patient, creative capital to support innovation and adoption of clean solutions in these sectors–transforming supply chains and agriculture systems, electrifying transport, and decarbonizing buildings.
Leaders in this theme are known for their patient allocation to transformational climate solutions and include creative and flexible grant advance programs which speed up the solutions supported by government grants.
Nature-based solutions
Not all climate solutions involve innovation or technological interventions. Some are focused on working with the land to restore balance in disrupted ecosystems, which store carbon when they are healthy. Addressing climate change holistically requires that we protect, preserve, and steward our natural environment.
Impact-driven capital is well-suited to the creative structuring and flexible timelines and return targets that can support deep impact in the natural world. Some players, for example, are deploying private capital to finance forest restoration aimed at reducing the risk of catastrophic wildfires.
Our greatest opportunity
By leveraging a framework focused on areas of greatest potential, impact investors can seize the greatest opportunity of our time to deliver deep climate impact, while simultaneously empowering the communities most affected.
Their private capital is essential, even as major governmental initiatives, like the new Greenhouse Gas Reduction Fund (GGRF), are transforming our path to progress via the public arena. The GGRF will make all four of the impact themes outlined above substantially more “investable” by proving new concepts, scaling the most impactful solutions, and de-risking investments for follow-on capital. In the months ahead, savvy private investors should watch for the ripple effects of this unprecedented government investment and prepare to deploy their capital in these new ways.
Working in the context of this transformative government action and leveraging the focused approach described above, we’re confident that private investors can help bend the arc of progress in this decisive decade in favor of our planet and its most vulnerable people.
Margret Trilli is the CEO and Chief Investment Officer of ImpactAssets.
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