Extreme heat is engulfing much of the world this month. The recent heatwave in India killed over a hundred people and struck down tens of thousands with heatstroke. The Horn of Africa still reels from a prolonged drought that has threatened the food security of tens of millions. More than 1,300 people died during this year’s Hajj pilgrimage in Saudi Arabia. These are just the current examples of how the climate emergency is gathering pace. In the next week and the next month and next year there will be a great deal more.
Governments – particularly developing nations – are primarily focused on these immediate impacts of the unfolding climate emergency. Against this scorched earth background, there is a stark case for accelerating private investment in adaptation and resilience (A&R).
Yet, while investors are increasingly seeing the value of renewable energy ventures, the scale of private investment in A&R remains low. And to compound the issue, there has been a tendency in some quarters to overlook the importance of private sector A&R solutions.
Let’s unpack that. The climate adaptation opportunity is significant and growing. Over the past 50 years, weather, climate and water-related disasters have had a total economic cost of $4.3 trillion, with costs rising every decade. The need to prevent and reduce climate-related risks on economies and societies is expected to grow inexorably in the coming decade, regardless of the pace of decarbonisation. A&R solutions are, therefore, essential and a $2 trillion market opportunity the private sector cannot ignore, according to the World Economic Forum. But the longer it takes to plug this funding gap, the more expensive it gets.
This is not an abstract equation. As temperatures start to soar during this year’s London Climate Action Week, many will recall the impact of the 2022 heatwave. This was estimated by LSE as costing as much as £300m to the UK economy, and resulted in almost 3000 deaths.
So while we attempt to rapidly decarbonise the world’s economy, the need to deal with the problems of climate-related impacts today becomes ever more acute.
Beyond renewable energy generation and electric vehicles – the two industries that between them attract nearly three quarters of all climate tech equity investment, according to PWC – a host of other industries are providing emerging opportunities for investors.
A great example of this new breed of company that can generate value is Fasal, which leverages crop science and “internet of things” devices, to help farmers optimise water consumption and improve crop yields. By offering weather forecasts and related real-time advice to farmers, Fasal is providing A&R services to help farmers prepare for and prevent the worse consequences of extreme weather events.
But while the opportunities for effective capital deployment are multiplying, those with the funds to deploy often find themselves ill-equipped to seize the opportunity.
That was one of the main reasons why British International Investment has just published a Climate Investment Playbook, aimed at the myriad of VCs, private equity funds and others, who often have tens of millions of dollars to invest, rather than multiple billions.
Existing climate finance methodologies tend not to be catered to VC or private equity investing. Those that do exist, do not provide a holistic picture of both mitigation and adaption finance i.e. the whole climate finance spectrum. There’s also a lack of guidance on how to go about climate investing more generally – for example, how to develop a strategy or integrate climate into an existing strategy.
The starting point for climate investing is defining climate impact objectives and developing an investment strategy geared towards achieving them. It implies determining positive and measurable climate impacts targeted to solving key climate change challenges and defining how to realise them to achieve the intended climate impact objectives.
Gender, diversity, and inclusion are critical factors to consider in a climate investment strategy. This is because disadvantaged and marginalised groups are often the most vulnerable to the impacts of climate change. These groups also play a unique role in driving the adoption of climate A&R and mitigation solutions, as well as developing climate solutions.
Once the path to impact is defined, an investor can set measurable climate impact metrics and targets, and a process to manage impact achievement on a portfolio basis.
Integrating climate impact assessment into the investment process is crucial for evaluating new opportunities consistently. And investors, to build market trust and evidence to meet regulatory-related requirements, ought to determine the proportion of capital invested in climate solutions.
The world needs to commit trillions of dollars to meet the challenge of the climate emergency. The good news is, on a global level, the capital does exist. In this instance, our role is to make sure private equity and VC investors of all sizes know how to deploy it both effectively and profitably.
By providing investors with a playbook on how to do that, we are taking one more step towards in bridging the huge climate adaptation finance gap that exists today.
