NDF - Financing for climate change and development projects

Private equity can fight climate change, says Lightsmith Group’s Jay L. Koh

Photo: Marjo Koivumäki
Jay L. Koh, Co-founder and Managing Director of Lightsmith Group
Photo: Marjo Koivumäki
Barbara Buchner, Executive Director of Climate Policy Initiative, Jay L. Koh, Co-founder and Managing Director of Lightsmith Group, and Felix Bikpo, Group CEO of the African Guarantee Fund
Photo: Marjo Koivumäki
Illustration: Sanna Turunen

And there are investment opportunities right now and ready for scale

“Climate change is not a new risk. It isn’t aliens landing on the earth kind of risk,” said guest panellist Jay L. Koh, Co-founder and Managing Director of Lightsmith Group, at NDF’s recent 30-year anniversary gathering in Helsinki. “But it is changing and shaping existing types of risk with increasing complexity and severity.”

Take wildfire. Koh points to PG&E in California, once the tenth largest utility in the US with a market capitalisation once as high as USD 60 billion. Last year, the utility filed for bankruptcy as it grapples with an increasingly volatile operating environment exacerbated by climate change in the form of a grid more vulnerable to severe wildfire seasons.

“Climate change is a today risk,” says Koh, “in the sense that this is no longer a theoretical future risk.” Citing losses piling up in the real economy including record losses in the insurance and reinsurance, he explains that this is no longer just an economic risk assessed by governments, it has become a financial risk to institutional investment portfolios.

Koh’s intention here is not to discount the gravity of climate change. “This is a humanitarian tragedy, people are dying, people are being displaced, ways of life and biodiversity are being disrupted in ways we’ve never seen before.”

The pivot is that there’s also an opportunity
Wherever there’s a very large challenge there’s potentially a very large opportunity. Koh believes, we’re now in the midst of recognising the scale of that opportunity. And the good news is that many of the right tools to assess and manage climate risks and impacts are already out in the market.

The Lightsmith Group has developed CRAFT – the world’s first dedicated private investment strategy to focus on investing in climate resilience. “Private institutional pools of capital can help address the climate adaptation problem,” says Koh who is a self-described optimist on finding the way forward. 

Private equity can fight climate change
CRAFT has already identified 20 target market segments where private sector businesses are already active in the adaptation space and ready for scale.  These are in areas like weather and agricultural analytics, disaster risk modelling, and distributed water solutions.

Investing in climate resilience companies can generate two outcomes – extranormal growth for those companies and returns for investors, as well as measurable impact on the climate change problem itself. “These outcomes are complementary, or win-win,” says Koh “the faster these technologies and solutions grow, the more capacity we will have to deal with climate change.  We need to scale up the tools to address the impacts of climate change on everyone, particularly the poor and most vulnerable.”

Where is the public sector in this?
At the moment, public financing for climate resilience is setting priorities at a macro sustainability level, focused more on positive societal outcomes. Whereas climate change is many different things, and according to Koh, the private sector reacts to various components of these.

In the framing of resilience building, there are also two distinct languages in play. “There’s a public sector language and a private sector language,” says Koh, “and, interestingly, NDF has been quick enough to become fluent in both.”

Koh jokes to illustrate his point. “You as a person, or you as a company, don’t go out and buy a mitigation or an adaptation. No, you buy energy and you want that energy to be clean, and you want it to be reliable and resilient to climate change.”

So, where does that leave us?
“Today, we know with some degree of certainty that we have a choice: in ten years, the climate will have changed—will we meet back here in Helsinki and have the same conversation of today?” Koh asks the audience, “or will we be in a far better position as a result of important – and attractive –investments made into climate resilience. The choice should be clear.”

Written by Laurel Colless

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