What can finance do to mitigate climate change?

The finance sector is incredibly important in financing a shift in energy technologies. There could be cutting-edge investments in renewable energies. These energies, with increased R&D over the past twenty years, have recently experienced a huge drop in price and a large increase in reliability. Because of this, they are proving to likely be good investments. For example, I attended a talk in which one of the panelist was Huang Ming, the founder of Himin Solar. He described how his company has experienced rapid growth, especially in a Chinese market. He has begun to develop “solar everything” – his company develops not just traditional panels, but also some oddities like solar hats, solar toys, and solar fans. Thus, with the right management and business strategies, renewable companies can prove to be extremely good investments. With increased investments, these companies could also expand and help facilitate a worldwide shift towards renewables. This will be particularly important as fossil fuels become more and more dangerous to exploit.

But why would the finance sector even care?

Very simply, the investments can pay off. Furthermore, by divesting in dirty energy, they are minimizing their risk. The onset of climate change impacts three types of risk – physical, with the increase in extreme weather, transition, as policies can make the market uncertain and riskier, and legal liabilities, as claims are increasing and investment companies may be secretly implicit. Finally, investing in renewables can better a company’s corporate image. A renewables portfolio could certainly help develop a company’s CSR, as well as help the world transition.

However, the renewables industry must also accomplish a few goals before the financial industry can completely shift to include them. Policies must be clear, and motivations must be stated clearly in order to decrease the risk from uncertainty. There needs to be disclosure by the companies of long and medium term growth strategies. There also needs to be increased revenue, as burn rates, barriers to market entry, and lack of deployments have cause a lack of revenues. Finally, there needs to be a standardization of policies, in order to better enforce disclosure of critical information.

Of course, this is all much, much easier said than done. However, I hope the financial industry helps in making the renewable energy sector more profitable through increased investment, and the renewable energy sector will then become more financially stable and sustainable.

 

Maria Ivanenko