If the green revolution is to succeed, investors must play a leading role

This article originally appeared in The Times on 26 October 2021 (see it here ). ??

The transition to a lower-carbon economy requires one of the largest rewirings in the global economy, with $3.5 trillion of investment needed annually until 2030. Before Cop26 in Glasgow, it's clear only collective action can achieve this. The shift to net zero will depend not only on a policy framework, but companies and investors also seizing the opportunities and navigating the risks of a complex transition. And we simply can't get there without multiple technologies, some of which don't yet exist. Which is why the innovation agenda is critical.

The transition to a lower-carbon economy requires one of the largest rewirings in the global economy

There has been tremendous progress on sustainability reporting standards, net-zero commitments and climate stress tests in the past two years. Today, investors focus more than ever on how firms are adapting and they will increasingly look at the real indicators of change. Net-zero targets are about aspirations; research and development and capital expenditure are about destiny.

Investors will scrutinise innovation spend. And they will find the pace of change is uneven. UBS research suggests 86 per cent of US carmaker investments for the next five years is focused on electric and autonomous vehicles, while European firms have committed only 53 per cent of their budgets but are starting to pivot hard.

But investors face a big challenge — a lack of data in some sectors means they don't have a rich enough picture of how firms are adapting.

Here are three ideas that could help investors play a larger role in financing the innovation that will be key to a smoother energy transition.

First, foster alignment towards a global framework for sustainability reporting that encourages innovation. As governments consider mandatory climate disclosures, we see the risks of fragmentation of capital markets from different frameworks and rules. While each country will wish to make its own choices, global investors want to identify, fund and track progress of a decarbonisation strategy globally. The Task Force on Climate-Related Disclosures is the gold standard. But any additional framework needs to be flexible enough to fund innovation and keep up with scientific developments.

Investors want to identify, fund and track progress of a decarbonisation strategy globally

Second, asset owners should demand the same standard of disclosures from their private and property investments as they do from their public market assets, so they can have a total portfolio view of decarbonisation.

We are seeing rapid progress in listed company disclosures and bond markets where investor engagement is influencing corporate actions. But higher standards in the public market risk some polluters going private, seeking less transparency. A whole-economy transition needs private markets to shift too.

Third, we should catalyse more innovation in public and private capital flow in emerging markets' transition. By marshalling more capital to finance clean-energy projects and research and development, investors can support developing nations in their transition to renewable power.

The role of the private sector could be magnified through development banks. Development banks provided $66 billion of green-related finance last year and this could be doubled or tripled to turbocharge clean-energy technology investment. Innovation in the mechanisms to bring private capital to the table as a multiplier for public or development bank dollars could yield material results.

Whether through capital increases for the key development banks, simpler and smarter public-private partnerships, or by changing the capital frameworks and bank mandates, it is critical these institutions do more. For instance, should there be different costs of capital for green and transition finance projects against others? These are urgent conversations and a constructive debate about leveraging balance sheets to support innovation and the green transition should be a priority at Cop26.

The green revolution, like the industrial and technological revolutions, will be fuelled by capital markets and banks

The green revolution, like the industrial and technological revolutions, will be fuelled by capital markets and banks. No government or public body can meet this challenge alone. Without a keen focus on funding innovation, the whole-economy transition won't go fast enough or far enough to save the planet. To avoid that tragedy, we must act now.

For more on UBS and our sustainability and impact efforts, visit ubs.com/sustainability .?