What is a private investment

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Climate protection or profit? Both!

Private investment as an opportunity

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Wedge, Jonas
The Current Column (2018)

Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) (The current column of June 4th, 2018)

Bonn, June 4, 2018. At the end of May, representatives from the financial industry, technology companies and politics met in Frankfurt for the “Innovate4Climate” trade fair. For three days they exchanged ideas about how private companies and investors can contribute to achieving the climate goals and generate profits at the same time. The topics ranged from investments in renewable energies and carbon markets to innovative insurance against climate risks. The event highlighted the trend in recent years that the private sector is becoming more and more active in climate protection and sustainable development - areas that have traditionally been viewed as tasks of politics. What is to be made of it?

One thing is clear: in order to achieve the goals set in 2015 in Paris and to send the world economy on a climate-friendly development path, a gigantic investment need has to be met around the world. The industrialized countries have pledged to support the climate protection efforts of the developing countries with USD 100 billion annually starting in 2020. However, the total investment requirement for climate and sustainable development is even greater: The OECD estimates that for the years 2015 to 2030 the sum of the necessary global infrastructure expenditures in areas such as energy supply or transport will devour a total of around USD 100 trillion. Politics alone cannot mobilize the necessary capital for this and ensure that it is invested in innovative and climate-friendly technologies. It is therefore essential to get private investors on board.

What drives the private sector

It is important to understand the motives for climate-friendly investments. It is true that an increasing proportion of investors are guided by ethical motives when they include climate protection in their actions - it should not be concealed, however, that many investors are simply looking for new business models and profit opportunities. This is driven not least by the challenging economic environment, in which old business and investment fields are increasingly crumbling away due to developments such as the current low interest rates, the shift in economic power towards Asia or megatrends such as digitization.

One can be concerned that the important goals of climate protection and sustainable development could be subordinated to private profit interests. But one should rather see this as a great opportunity: If politicians manage to set the right incentives and framework conditions for investors, then in future an ever larger share of private capital will be used in accordance with the goals of climate protection and sustainable development.

Balance between voluntariness and rules

The right rules are immensely important here. You need to make sure that climate-friendly investments are actually climate-friendly, and not just look. The market for green bonds illustrates the opportunities and challenges of private investments very well. Green bonds are a relatively new financial instrument that companies use to collect money from private investors and promise to invest it in green projects. But which projects are really “green” is partly controversial. If this is still clear for solar energy, the answer is no longer clear when installing better filters for coal-fired power plants. It is also not always certain whether new money will really be collected for green projects or whether investments that have already been planned will simply be given a green coat of paint.

Voluntariness can be a key to creating transparent rules. At the initiative of representatives of the financial industry and other interest groups such as non-governmental organizations, voluntary regulations such as the “Green Bond Principles” or the “Climate Bond Standards” have already emerged and are continuously being developed. This can provide more information and transparency for investors and the public.

Politicians are well advised to take up such voluntary private sector initiatives and develop them further. In this way, a balance can be achieved between the interests of politics and business: on the one hand, the acceptance of rules is increased and these are tailored to the needs of business, on the other hand, it is also ensured that the rules are effective and take into account the interests of all social groups. The European Commission will shortly present its own set of rules for the classification of green financial products, which will also take up voluntary standards. International platforms such as the G20 should also be used to harmonize rules and standards internationally. In this way, it can be achieved that the private sector makes a meaningful contribution to covering global investment needs and achieving climate goals.

This column was also published on 06/04/2018 on makronom.de.

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