The question: how to mobilise trillions of dollars of institutional capital to meet the gargantuan challenge/opportunity of climate change.
The answer (according to one panellist at a virtual event organised by the Global Impact Investing Network Wednesday): allocate capital towards “the inefficient end of the spectrum”. In other words, invest into private markets to back early-stage businesses that can make a real difference.
James Gifford, formerly the founding executive director of UN PRI who now heads up sustainable and impact advisory for Credit Suisse in Singapore, said that mainstream institutional investors “need to think carefully about the mechanisms of impact”.
One mechanism is capital allocation – specifically, moving away from mature financing opportunities: “I’m amazed at how many people think that by investing in a large-cap stock, you are making a difference to the world. Once something is up and trading… most of the time you are just swapping ownership with someone else… nothing really changes”.
He referred to green bonds: “If they are investment grade, they will be over-subscribed… the work has already been done and somebody else has taken the risk… The bottleneck has to be earlier up the chain in project development and venture capital.”
Gifford was to some extent talking up Credit Suisse’s book. In late May, the bank held a final close on its first Climate Innovation Fund, a £318 million ($445 million; €371 million) fund of funds “dedicated to allocating capital at the intersection of mission-driven, venture capital companies focused on disruptive technologies, solving for a significant reduction of greenhouse gas emissions”, according to the press release.
A bank raising capital for VC is “highly unusual”, Gifford said. With individual fund opportunities being sub-scale and too risky for wealth management clients, Credit Suisse had to “pool the risk” in a fund of funds vehicle.
When asked whether governments should be using tax-based incentives to mobilise capital toward climate solutions, Gifford instead drew attention to the regulatory barriers that prevent retail investors from accessing private markets opportunities.
“Retail investors are able to invest in a Ferrari, or a restaurant in Manhattan that will almost certainly go bankrupt, but they can’t invest in private market impact funds,” he said. While he appreciates the need for investor protection, he added: “It would be interesting to explore how retail investors could get access to more institutional quality impactful products.”
As a parting thought, Gifford – who previously headed up impact investment for UBS Wealth Management – said: “I used to think investors are the top of the chain; that the world would follow the money. I no longer think that. I think investors are the followers and it is the scientists and entrepreneurs who are the real leaders, because they are the ones who will generate economically valuable, commercial companies and technologies. They are the ones who will save us.”
He cautioned against mobilising capital to the roll-out of existing solutions at the expense of backing earlier stage opportunities. “My pitch is: we should not treat all climate investments equally.”