Letter to Editor
THE race to decarbonize the global economy is on. But a new study suggests the climate crisis is, at its core, a financial crisis. The staggering sums needed to transition to clean energy dwarf what governments alone can provide.
The transition to a clean energy future is no longer a technological fantasy. Solar and wind are now often cheaper than fossil fuels. Electric vehicles are mainstream.
So why does the transition feel so slow? The single biggest obstacle is finance. Bridging that multi-trillion-dollar gap is about rewiring the entire global industrial base—energy, transportation, agriculture, and manufacturing—all at once.
This requires capital on a scale that dwarfs the Apollo program. Governments simply do not have these sums. The only source is private capital. Yet, the global financial system has not yet been harnessed into these critical projects.
There is a mismatch between the risks of green investments and what traditional finance rewards. Building a grid-scale battery storage facility requires enormous capital today for returns that may materialize over 20-30 years.
Most private investors demand quicker, more predictable returns. Investors also fear betting on the wrong solution. A fossil fuel power plant, by contrast, has a known business model.
For many solutions, like sustainable aviation fuel or green steel, the cost is still higher than the dirty alternative. Who pays that premium? The market hasn’t yet figured it out, creating uncertainty for investors.
Perhaps the most perverse bottleneck is that the price of capital often fails to reflect the true cost of climate change, seen as a massive market failure.
Fossil fuel investments have long enjoyed an implicit subsidy because their price does not include the colossal social and environmental costs—the healthcare bills from pollution, the disaster recovery from extreme weather, the existential threat of a destabilized climate.
Because these “externalities” aren’t on the balance sheet, dirty investments can appear artificially profitable. Simultaneously, the massive systemic risk that climate change poses to the entire financial portfolio—from flooded coastal assets to collapsed agricultural supply chains—is still not accurately priced in.
Investors are, in effect, making decisions with a blindfold on, unable to see the true risk of inaction. The Result? Capital continues to flow towards the old economy, effectively subsidizing our own destruction, while the new economy struggles to attract funding despite being the only viable long-term path.
Solving this is requires making projects palatable for private investors. And creating new ways to bundle, securitize, and trade green assets to improve liquidity and attract different types of capital. Not to mention mandating clear, consistent climate risk disclosure so the market can finally price risk accurately.
We have the technology. But without a financial system redesigned to fund it, the energy transition will remain a dream. Unleashing private capital is the only option.
This has given rise to the critical field of “climate finance,” the study of how to price, allocate, and manage capital to address climate change.
But is academic research keeping pace with the breakneck speed of the real-world problem? A new working paper from Matteo Gasparini of Oxford and Peter Tufano of Harvard Business School, “The Evolving Academic Field of Climate Finance,” delivers a startling answer: not even close.
The focus of academic literature is overwhelmingly on the role of public finance. Papers on topics like carbon pricing, green bonds, and the cost of capital for green investments are dwarfed by a preoccupation with government policy and public funding.
Yes, smart public policy is an essential catalyst. But governments don’t have the balance sheets to build a global network of renewable energy plants.
That capital resides in the vaults of institutional investors, asset managers, banks, and corporations. So, why the disconnect? Research on public finance often relies on established economic models and readily available data.
Studying the intricate, often proprietary, mechanisms of private markets is far messier and more difficult.
A deliberate rebalancing of research effort toward the mechanisms that can attract and deploy private capital at scale is needed. Climate finance requires insights from engineering, data science, law, and sociology to understand the real-world viability and impact of investments.
It requires moving beyond diagnosing the problem to designing and testing financial instruments, business models, and measurement frameworks that work.
The climate crisis is the defining challenge of our time. We have mobilized scientists, and activists. But if we fail to mobilize the minds of our finest financial thinkers to tackle the problem of funding, we will lose.
Academia must step out of the ivory tower and into the deal room. The future of the planet may depend not just on the technology we invent, but on the financial ingenuity we apply to deploying it.
Professor Dato Dr Ahmad Ibrahim is an Adjunct Professor at the Ungku Aziz Centre for Development Studies, Universiti Malaya.
The views expressed are solely of the author and do not necessarily reflect those of MMKtT.
- Focus Malaysia.
