Climate change is already affecting our everyday lives and mitigation and adaptation actions need to be taken now. Many technical advances have been made in climate solutions, but their implementation needs funding. On May 3, 2024, CAFIN, held a workshop that focused on the question of how we can bring more private sector funds into this process. The workshop was co-sponsored by the UCSC Center for Coastal Climate Resilience (CCCR) and UC Office of the Chief Investment Officer (UC OCIO). Here is the “Financial market solutions for funding green transition and climate resilience” conference program.
Financial market solutions for funding green transition and climate resilience
The participants discussed policy advancements, empirical findings, and the theory of climate funding. The discussion addressed investor goals, information gaps, institutional framework as well as risks and uncertainties in funding climate solutions.
Investor Goals. Prof. Ayako Yasuda presented joint work with Prof. Keer Yang (both UC Davis) that distinguished three sustainable investment goals by intention: financial, categorical morality, and impact. Financial intention-driven funds acknowledge climate-related risks and make investment decisions accordingly, without jeopardizing risk-adjusted returns of the portfolio. Such investment funds are not at odds with the fiduciary responsibilities of investing organizations, which can be an important constraint emphasized by Wendy Pulling, Director of ESG (Environmental, Social, and Governance) strategy at UC Investments, and analyzed in the study of pension fund investments by Jane Zhang (UCLA).
Financial intention-driven and morality-based funds tend to exclude categories of assets from their portfolios, which might be counterproductive because it reduces funding to industries that need capital investments to “green” their technologies, such as those relying on fossil fuels. Only impact funds actually bring money to climate solutions. These can include investments into green technologies or active shareholding of companies that need to transition to climate-friendly technologies (both of these are in the UC Investments portfolio according to Pulling). Only a small portion of all sustainable investments are impact investments, as documented by Yang and Yasuda. Xingtong Li and Giacomo Rondina (both UCSD) presented a model that outlined conditions necessary for such impact investment to grow in scale.
Information Gaps. An important barrier to investment in climate solutions is the lack of clarity concerning the meaning of ESG labels. For example, Christian Kontz demonstrated that the ESG label at the company level is based on a weighted composite of various aspects of sustainability of operations and products, so that the correlation with the emission intensity of individual products, such as specific makes and models of automobiles is near zero. Prof. Francois Koulischer, presenting joint work with Marina Emiris and Joanna Harris, empirically demonstrated that the mandatory disclosure in the European context of ESG ratings affected mutual fund allocations. Bhavyaa Sharma (UCSC) showed that in the absence of public information banks’ efforts to determine the exposure of their borrowers to climate risks will affect the interest rates they charge on the loans. Agata Kotkowska illustrated similar informational issues in presenting the state of the European Union’s efforts to protect the goal of biodiversity – defining biodiversity in measurable terms has been an important precondition for progress. These studies suggest that information matters and that refining ratings to be more informative or accurate is important for channeling money toward climate solutions.
Risk and Uncertainty. Private investors face a high degree of uncertainty in the quest to channel funds effectively to achieve their climate goals. Risk models for standard situations, such as various insurance markets related to natural disasters, have to be updated, but the data is only emerging now. An increase in aggregate risks poses challenges for even the largest private insurers. Jon Qian examined some of the implications for insurance and reinsurance markets, as well as possible governmental actions to manage the transition and take on some of the largest risks. Another area where risk and uncertainty matter is innovations for new sources and technologies for energy use, including transportation, buildings, and industrial production. Wendy Pulling and other speakers discussed the role of venture capital and private equity investments in accelerating the speed of innovation.
Institutional Frameworks. The importance of regulatory innovations for information definition and disclosure was clear in the talks by Kotkowska and by Koulischer – the general principle implied was that price incentives alone will not be enough to achieve effective channeling of private capital to climate goals. Shisham Adhikari (UC Davis) shared her approach to incorporating climate transition into macroeconomic models, specifically focusing on the labor market. A global assessment by Dr. Renu Kohli emphasized the importance of non-price policies as well. Examples from Europe suggested that innovations in regulatory frameworks can be beneficial in setting the rules of the game without being overly restrictive – the idea is that private capital can still be invested very flexibly, even with new disclosure requirements, or even mandates.
Prepared by Nirvikar Singh, Galina Hale, and Wendy Pulling