Finance

To reach net-zero GHG emissions, we will need to transform every aspect of the world economy – from the way we make materials like steel, cement, and chemicals to the way we transport goods and people. Accomplishing this by 2050 will require more than four trillion dollars in clean energy investment each year, from 2026 onward. It will be the largest economic transformation in world history. 

Right now, only a fraction of that money ($1.7 trillion estimated for 2023) is flowing from investors into the energy transition. This is not because the energy transition is a bad investment. Most of the projects needed for the transition will pay for themselves over time, by saving money on energy. But many of the people, businesses, and even governments that could save money by using these technologies are not able to afford the up-front “capital expenditure” themselves, and are not able to borrow the money at an affordable interest rate.

Funding the energy transition will require an army of financial professionals with a deep understanding of clean technology, inventing creative ways to send investment dollars where they can be best used. Some of these financial professionals will work at existing banks and financial institutions. Others will work in climate technology startups, or in new financial startups that specialize in funding the development or deployment of climate technology. 

Let’s look at one example to understand the way in which creative finance can unlock clean-tech investment. In order to fully decarbonize, we’ll need individual homeowners to make a switch from electricity generated by fossil fuels to clean energy, from renewables like wind or solar. A great way for a homeowner to do this is to put solar panels on the roof of their home. It costs tens of thousands of dollars to put solar panels on the roof of a home in America; but the savings in the first six to ten years are enough to pay for that initial expense; and after that, the panels provide electricity for free. It can be a great deal for homeowners; but many homeowners cannot afford to pay the large up-front cost themselves, and an imperfect credit score often means that homeowners cannot access loans with affordable interest rates. In 2003, Jigar Shah founded SunEdison and invented a new financial model to address this problem. SunEdison would install solar on the roof of a homeowner or business for free, but would retain ownership of the panels themselves. In return, the homeowner or business would agree to purchase the electricity that the panels create – at a fixed cost lower than the cost of electricity from the electric utility. Customers saved money, SunEdison made money, and the world got more clean, renewable energy. Shah’s breakthrough innovation was financial, not technological; but it unlocked rooftop solar development in America. 

⇒ Shah is now the Director of the US Department of Energy’s Loan Programs Office, where he is working to use similarly creative finance strategies to unlock and deploy a host of technologies we need for decarbonization. Listen to this Zero Podast interview with him. 

We need financial innovations like SunEdisons’s for every climate solution, at every scale. “Financial engineering” can help homeowners replace their furnaces with heat pumps, help school districts replace diesel school buses with electric, help climate technology start-ups build first-of-a-kind factories, and help electric utilities in developing countries replace coal-fired power plants with wind turbines and batteries. Without financial innovation, we will not deploy climate solutions at the speed and scale that the climate crisis demands. 

Here are a few examples of the many ways a career in finance can contribute to the climate fight.

Venture Capital

Thousands of startups are developing novel technologies to address climate change. Some are working to build battery-powered electric airplanes; others are working to produce cement or steel without emissions, to make it cheaper and easier for people to install heat pumps in their homes, and to produce jet fuel out of captured CO2. Venture Capital (or VC) investors put money into startups like these at their very early stages, when they are not yet making money, and there is a good chance that the startup will fail – because the technology it is developing does not work, or because they cannot make it cheap enough, or because potential customers do not want to take a chance buying a new technology, or because a competitor gets there first, or simply because they run out of money before they have enough income to cover their costs. Venture Capital funds expect that nineteen out of twenty startups that they invest in will go out of business – but they hope that one in twenty will be successful enough to compensate for all the other losses. 

Among the thousands of venture capital firms, a small but growing number invest only in companies working to address climate change. In order to succeed, these firms need deep expertise on climate, and the space of climate solutions.

⇒ To get a sense of what one of these VC firms does, listen to this great My Climate Journey podcast interview with Amy Duffour, who is Managing Director of Prime Impact Fund.

  • To understand the history of how Climate TechVC investing has emerged and developed, over the last several years, listen to this Zero podcast interview with Dipender Saluja, Managing Director of Capricorn Investment Group.
  • Catalyst is a podcast hosted by Shayle Kann, an investor at Energy Impact Partners, a VC firm focused exclusively on climate and the energy transition. His podcast is a really smart, analytic attempt to understand the climate solutions space, from the standpoint of an investor. We recommend this highly. 
  • The best place to learn about the whole climate tech-VC ecosystem is to subscribe to the excellent Climate Tech VC newsletter. (This is a great resource for learning about climate tech startups, even if you’re not interested in venture capital.)
  • The My Climate Journey podcast has a Capital Series, interviewing a wide range of VC investors in climate.

First of a kind financing

Many of the most impactful climate technology startups are “hard tech” companies: they’re trying to “move atoms, not bits” – that is, they’re working to make physical things, not just software. Maybe they aim to build a refinery that can create chemicals from biological feedstocks, instead of from fossil fuels. Maybe they aim to build a factory to build and sell electric airplanes. Or maybe they want to build new, advanced geothermal power plants. The commercial-scale facilities or factories they need to build might cost more than a billion dollars each. In an ideal world, once a startup has proven that its technology works at smaller scale, banks would step in to loan them the money to build their first commercial-scale facilities. (Venture Capital firms are not designed for this kind of low-risk financing.) But banks are generally unwilling to loan money for a facility that is the first of its kind, because they do not understand the risks involved. Many climate technology startups with good technology and a good business model have failed, because they were unable to raise the money to build a first, commercial-scale facility.

A few creative financing companies are working to help startups cross this “valley of death.”  One of them is Generate Capital. They can step in where banks will not, in part because they bring a deep understanding of the space of climate solutions, so that they can evaluate a loan in a new technology sector in a way that banks are not equipped to do.

⇒ Listen to this great Catalyst podcast interview with Generate’s Co-Founder, Scott Jacob.

To decarbonize the entire world economy in the years ahead, the world will need many more financial innovators like Generate, with expertise in every nook and cranny of the space of climate solutions, and expertise on conditions in every country on every continent. 

Financing to unlock deployment

Most of the technologies we need in order to decarbonize our economy are ready and available now. We’ve already mentioned that one of the obstacles to deploying them at the speed and scale the world needs is the up-front cost. But there are other kinds of financial barriers too. For instance, it’s often the tenant of an apartment or a commercial building who pays the utility bills, not the building’s owner. That means that the owner usually has no financial incentive to invest in insulating the building, or installing heat-pumps, even if it would save money over time. This is another case where clever “financial engineering” can unlock a solution in which everyone – the building owner, the tenant, and the planet – is better off.

 ⇒ Listen to this great Volts podcast interview with Rob Harmon, who has devised one clever way to solve this problem, by creating a financial structure from which everyone benefits.

Finance in the Developing World

While the world spent over a trillion dollars on the energy transition in 2022, only a tiny fraction of that went to smaller and poorer developing nations. These are the countries that can least afford to pay the high up-front costs of the energy transition, that are among the most dependent on dirty coal power, that have some of the world’s greatest unmet energy needs. The challenges to meeting these countries’ needs for affordable financing are many and complex. We discuss them in more detail in the page on careers in international development. Finding ways to meet these challenges will require people attacking from a thousand different angles. 

⇒ For one clever approach, listen to this podcast interview with Emily McAteer, founder of Odyssey Energy.

Impact Investing

Many investors, from managers of university endowments to individuals saving for retirement, want their money to do good, rather than adding fuel to the fires around us. In response, the financial industry has created a huge, new approach to investing, called “ESG” (Environmental, Social and Governance). In 2022 investors poured over $2.5 trillion into ESG funds. These funds earn hefty fees for the firms that manage them, but as ⇒ this terrific article in the Harvard Business Review explains, the idea that ESG investing fights climate change, or any of the other environmental or social harms that investors think they address, is a confusion. It’s not what they’re designed to do. Many ESG funds invest regularly in coal companies, oil and gas companies, and other businesses that work hard to delay climate action so that they can extend their profits.

On the other hand, impact investing is an approach that does aim to make a positive difference, by investing in companies that are actively doing good, and refusing to put money into companies doing the most harm. This approach to investing is relatively new and relatively small, but a few investment firms are pioneers. 

 ⇒ Listen to this great My Climate Journey podcast interview with Zach Stein, the founder of Carbon Collective, a startup investment firm that offers an impact investing 401k.

Further Resources

  • Saul Griffith, “A Mortgage is a Time Machine” in Electrify, pp. 125-29.
  • Régine Clément, “Catalytic Capital” in All We Can Save, pp. 171-175.