Home BusinessEconomic News What Climate Finance Needs by Nouriel Roubini & Reza Bundy

What Climate Finance Needs by Nouriel Roubini & Reza Bundy

by Paul Morgan

As the world grapples with the urgent need to address climate change, it is crucial for policymakers and asset owners to rethink how capital is channeled on a large scale. In order to prevent catastrophic climate change and facilitate the transition to a net-zero economy, new financial instruments need to be developed that are profitable, liquid, and easily accessible to savers and investors worldwide.

Currently, many investors view climate-centric investments as having “social impact” but reduced profitability. While sophisticated investors have the means to profitably invest in decarbonization and the energy transition, these investments often remain illiquid and inaccessible to ordinary investors who are most vulnerable to climate-driven food, water, and energy insecurity.

To unlock this untapped pool of capital, climate investments need to be both profitable and accessible to all. The upcoming COP28 offers an opportunity to rethink how market solutions can be delivered and how digital innovation can scale up promising models. It is crucial to mobilize capital from individual investors and institutions such as pension funds, insurers, and sovereign funds. Retail-friendly, liquid instruments such as exchange-traded funds (ETFs) can help achieve risk diversification.

A profitable, long-term, climate-aligned investment strategy should comprise three main asset types. The first is climate-resilient real estate and infrastructure, which refers to assets in stable geographies with low climate exposure. These assets are likely to appreciate significantly as populations shift to more resilient communities. Real Estate Investment Trusts (REITs) and exposure to greenfield developments through ETFs are two ways to secure reliable returns from climate-adaptation efforts.

The second component is green commodities, which are necessary for a transition to a more resilient future. Massive investments are needed in energy, food, water, metals, and critical minerals for renewable energy and electric vehicles. Boosting production and lowering the cost of securing these commodities is essential to avoid “greenflation” and supply bottlenecks.

Lastly, a climate-aligned portfolio should include assets that provide a hedge against inflation and geo-economic risks, such as short-term and inflation-indexed sovereign bonds and gold. These assets offer extra stability and liquidity, meeting the needs of individual investors, pensioners, and savers. Additionally, greater investments in inflation-proof sovereign assets enable governments to finance the green transition.

To have maximum impact, these climate-investment instruments should be made available to all investors on liquid and low-cost terms. While ETFs can help, it is essential to consider the unbanked populations of the Global South and younger generations who may find digital assets more appealing. A digital, tokenized representation of climate-investment solutions could provide global scale while protecting those most at risk. However, it is crucial that these digital assets are backed by real-world physical and financial assets to mitigate speculation risks and preserve liquidity.

In conclusion, policymakers and asset owners must urgently rethink how capital is channeled to address climate change. With the costs of climate change escalating rapidly, innovation in technology and finance is essential. The time for empty green-wishing is over, and COP28 offers an opportunity to take decisive action and accelerate the global transition to a net-zero economy.

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