Going Green: How to Get the Money

There’s a huge, untapped source of financing for clean energy development that could help reverse global warning. Chazen Senior Scholar Patrick Bolton reveals how sovereign wealth funds could make the world a cleaner, greener place.
Sharon Kahn |  January 27, 2011
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Last summer, melting of the Arctic ice cap exposed one million square miles of open water — or, as the New York Times estimated, the equivalent of six Californias. Climate horror stories such as these make clear that “something has to be done” to reduce the carbon emissions that cause global warming — but the response to date has fallen woefully short. The Financial Times reported that total clean-tech investment needs to reach $500 billion a year to hold global warming to less than 2 degrees Celsius, beyond which scientists say climate change becomes irreversible and catastrophic. But Bloomberg New Energy Finance put 2009 investment in the sector at just $162 billion.

Enter Patrick Bolton, a Chazen Senior Scholar and the Barbara and David Zalaznick Professor of Business at Columbia Business School. In a conference held at Columbia University last fall, he proposed the formation of an International Green Fund (IGF). Along with authors Roger Guesnerie of the Collège de France and Frederic Samama from Amundi (Credit Agricole Group), Bolton argued that “a new type of financing is needed” to encourage both the technology and infrastructure support needed to create alternative energy solutions. With the commercial financial system crippled by the recession, he asserts that a new vehicle is needed to combine technology management and investment (traditionally practiced by venture capitalists) with infrastructure and project financing (usually the realm of private and governmental funding).

Luckily, a huge source of untapped funds is available: sovereign wealth funds (SWFs). Government-owned investment vehicles funded by their commodity export revenues or foreign-exchange assets, SWFs controlled an estimated $3 trillion to $4 trillion in 2009, roughly twice that of hedge fund assets under management. A for-profit green fund, financed mainly by SWFs but also tapping other institutional investors such as pension funds, the World Bank, IFC, and other long-term private investors, could provide a massive war chest to tackle climate change.

And why would SWFs take on such a financially uncertain task? “We believe that for such long-term investors there will not only be satisfactory financial returns from investing in an IGF but also significant social returns,” said Bolton.

If properly structured, financial rewards from these investments seem likely. The FTSE Environmental Technology (ET) 50 Index outperformed a composite containing the S&P 500, Nikkei and FTSE indices by 23 percent between February 2006 and February 2008.

Bolton suggests that an International Green Fund, massive in scope and global in nature, would enjoy at least four advantages over existing green investment funds. It could:

Shorten the development cycle of new technology. Because it would fund numerous projects and have an environmental mandate, an IGF would encourage sharing of knowledge. Put another way, each scientist wouldn’t have to invent the wheel alone.

Create a standard platform. Governmental involvement could provide a forum for creating common international standards. An IGF might also develop protocols for licensing and managing intellectual property on a global scale.

Overcome political opposition. World Bank or IMF-sponsored green investment proposals have been shot down, in large part because they were seen as an unwelcome form of mission-creep for these multilateral agencies. This is why it makes sense to set up an international fund entirely dedicated to green investments. Moreover, the participation of SWFs from emerging market countries could help overcome local political constraints to such investments and reduce political uncertainty around the maintenance of green investment subsidies and carbon taxes. Also, an IGF could avoid political backlash by diversifying investments across the globe.

Bolton envisions that the fund’s governance structure would further mitigate political constraints. “The first purpose of the IGF is to coordinate green investments, which SWFs and other long-term investors would have already been contemplating on an independent basis,” he explained. With investment worthiness as its first priority, an IGF would be managed by finance specialists knowledgeable about alternative energy investments. Of course investor countries would get their say, too: participating SWFs and other long-term investors would be represented on the IGF governing board charged with setting strategy, similar to a standard board of directors.

Deal with systemic risks, such as extreme weather that is the inevitable by-product of global warming. Said Bolton: “An IGF could potentially serve the same role in the prevention and mitigation of such climate catastrophes as the IMF plays with respect to global financial crises. It could invest in early warning systems, infrastructure development, and coordinate rapid relief efforts.”

Bolton envisions an “open architecture” approach that would allow investors to opt into the entire IGF, or simply buy into some funds dedicated to specific technologies or projects. “This opt-in approach, which allows motivated investors to tailor their commitment to their needs, is likely to be easier to kick-start than more ambitious all-encompassing plans,” he said.

Once SWFs are leading players in green investing, Bolton foresees a substantial uptick in the carrots and sticks that governments offer to consumers to switch to renewable energy consumption. With more solutions available, governments would be likely to strengthen restraints on carbon emissions (such as cap-and-trade policies) and reward early adopters with tax credits and subsidies. That, he said, creates a virtuous circle that speeds up adoption of green technology.

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