Reaching net zero It's an expensive job. However, Amin Benayad, BCG's global leader, climate and sustainability Financial institution practice states that money is not the only answer. Governments, financial institutions, NGOs and other funders will also need to change their approach and mindset. They need faster decision-making, a better understanding of and willingness to absorb risks, and a deeper awareness of nature's impact on business continuity..
BCG: Only half of the $37 trillion in investment needed by 2030 to reach net-zero goals has been committed. Where can we expect the rest to come from? How can we bridge the gap?
Amin Benayad: For me, the question is not where to get the money. Funding comes from philanthropy, governments, development finance institutions, multilateral development banks, corporations, banks, and investors. Mathematics works on paper.
The question is, how can we make sure money flows where it needs to go, at the right speed, in the right amount, and at the right time?
If you talk to executives at financial institutions, they'll tell you, “We're ready to put money into it, but there aren't many projects we can finance yet.”
If you talk to a project developer, they'll tell you, “There are 1,000 projects available for financing, but we can't find the money.''
Problems need to be fixed along the value chain. We need more well-thought-out, well-developed projects. We need to strengthen our ability to build quality projects from an infrastructure, engineering and risk management perspective.
Development finance institutions and multilateral development banks have a role to play. Some of them are set up to manage these risks.
Banks also need to start looking at the economic situation from a different perspective. We tend to compare funding opportunities today to other options. That's a false comparison. The cost of doing nothing is not zero. It's very expensive.
Finally, governments need to implement carrots and sticks that drive the entire economy, not just one company or one project. The US Inflation Control Act is a good example.The same goes for Carbon border adjustment mechanism In the EU. This kind of move by the government can have far-reaching ramifications.
if If you could wave a magic wand and fix one or two things about concessional, catalytic, or other non-traditional types of climate finance, what would they be?
I'm going to make sure we have enough skilled talent in the Global South, where we have to address both adaptation and mitigation to build quality projects.
We also want to simplify governance and processes within multilateral development banks, development finance institutions, and even commercial banks. We don't want a process that takes five years to complete. I used to work in a commercial bank and some decisions took three years. I don't have that luxury anymore.
What types of financial cooperation and innovation can help ensure that low- and middle-income countries receive adequate investment and financing?
Take for example green hydrogen projects in Africa. Investors (usually banks from the Global North) focus on geography. They may think there is a technology risk because the technology is not 100% mature. They think about national, regional and currency risks. They are much more comfortable with the risks of the dollar and euro than they are with the risks associated with African currencies.
Parties such as the African Development Bank, the International Finance Corporation, and philanthropic organizations could step in and assume currency and other initial risks. This is patient or catalyst money that allows returns of 0% to 5%.
If the initial risks can be addressed, the project will become more mature and the benefits will be more interesting for commercial banks.
Creative forms of debt exchange are also taking place, particularly for middle-income countries that are not technically eligible for concessional financing. These countries are struggling to finance climate change at current interest rates. In such cases, natural debt exchanges may be a promising tool.
What challenges do banks face in assessing their exposure to climate risks?
The first challenge is awareness. Banks are not fully aware of climate risks. We tend to think about 2030 or 2050, but some physical risks already exist. Banks are lending to farmers who are already experiencing water stress. Some of these loans may not be repaid for the next five years or more.
The second challenge is data. Imagine you are a bank looking to finance a project or asset in the power sector. You need to know your customer's physical assets. where are they? Not all locations are equally exposed to drought and heat. You need to understand the technology used in power plants. You need to know your production level. So it all comes down to data and using that data to translate climate data into financial impact.
How can the financial sector finance nature-related interventions and identify opportunities that arise from addressing nature-related challenges?
Nature today is probably where carbon was eight years ago. Some of the questions I'm hearing are: Where are the business opportunities? As commercial banks, can we make a profit while reducing our impact and protecting the planet? If we look at nature in isolation, there is no profit, let alone income, today. Often they don't.
But the bigger picture is how can we strengthen and ensure business continuity when fresh water is depleted? This small natural problem becomes part of a larger puzzle with high business stakes.
At the end of the day, it's important to define the right problem to solve. Rather than working in silos and solving niche problems, we need to connect natural problems to larger problems related to industry and human activity. Interventions that address business continuity and water-related issues are becoming economically viable.
You're talking about a change in mindset. Despite all the developments we read in the newspapers and see on TV, why isn't this happening?
It's happening, but not at the right speed or scale.
The incentive systems, KPIs, and lenses we use to view the world are not always aligned with the urgency of the crisis and the fact that what we do today will pay off in 10 to 15 years. It does not mean. Fifteen years is like an infinite amount of time for a company.
This discussion focuses on the E in ESG. It's all about the environment. But the story doesn't end there. S (social influence) does not necessarily match E 100%. We need to better understand a just transition and support local communities and workers. If you are a business or a bank, you need to carefully manage your dual social roles: protecting the climate, environment and nature and promoting a just transition.
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