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Investors may soon shy away from sectors such as agriculture in developing countries because of the risk of cataclysmic climate change
By Amal-Lee Amin
The Intergovernmental Panel on Climate Change (IPCC) Report on Monday made it crystal clear, if any further confirmation were needed, that the world stands on the brink of cataclysmic climate change.
Even if carbon emissions were reduced to zero tomorrow, there have been man-made changes to our climate that will take hundreds or even thousands of years to reverse. Events have been set in motion that now have an unstoppable force of their own. We can only hope that radical steps to reduce emissions spare us from an even worse onslaught.
My biggest concern is that the tipping point that seemed like the stuff of Hollywood disaster movies 25 years ago, are potentially just around the corner. Just prior to the IPCC report, the Potsdam Institute for Climate Impact Research in Germany published research which showed the Gulf Stream could be close to collapse.
If you are in the investment industry, the time for committing capital to support businesses and economies to adapt and become more resilient to climate change is not tomorrow, but now.
The case for devoting capital to adaptation and resilience (A&R) is irrefutable, but that does not mean that the required level of funding is flowing freely from investors. In fact, the nascent sector still faces a number of significant challenges.
Let’s take a look at an agriculture tech company that the CDC invests in, CropIn. It digitises the farm management process, using technology such as satellite images, artificial intelligence and machine learning to monitor crop health remotely, make yield predictions, and then pass on these insights to farmers. The goal is to optimise agricultural practices, improve farmers’ access to finance, and minimise waste – all helping to reduce impact on the environment and increase food security.
CropIn is now operating at scale. But to get to this point, it has needed grant funds from the Bill & Melinda Gates Foundation and equity investment from development finance institutions, including CDC, that can take on greater risk in the quest for greater impact.
The fight against climate change needs innovative and disruptive companies like CropIn. But the risk appetite that is required to back such start-ups is beyond many private investors.
And here is the horrible irony. In the developing world, where these start-ups are most needed, investors may soon shy away from sectors such as agriculture because of the risk of cataclysmic climate change. In effect, the threat of worsening climate change is making it increasingly risky for them to invest in the countries and sectors that are most in need.
The potential for climate risk to drive such capital flight makes it doubly hard for A&R entrepreneurs to raise the money they need to scale their businesses.
The other challenging aspect of A&R investing is that the local context matters and only local solutions will work. There are no cookie cutter technologies, such as solar panels, that can be used across whole countries or regions. That means that the venture capital investors that normally look to scale businesses rapidly to produce financial returns, are further deterred.
But all is by no means lost. The CropIn example shows that there is an exciting future for A&R investment. But it is one that takes the close cooperation of multiple actors including philanthropists (who back great ideas and are not looking for a financial return), development institutions and impact investors such as CDC (that do need a modest return and which invest for impact) and private investors (which are more focused on financial returns but have the deep pockets that take promising A&R companies to the next level).
The UN estimates that $300 billion per year is needed for A&R. Current finance is less than $30 billion.
But if governments, philanthropists, development institutions and impact investors and enlightened private institutions work together, we can create vital A&R solutions that produce the required financial return for investors and give developing countries the best chance to stave off the worst impacts of climate change.
Not only must we urgently strive to reduce and halt emissions contributing to climate change over the coming decades, we equally must help developing countries adapt to the havoc already caused.
Amal-Lee Amin is the director of climate change at CDC Group, a British development finance institution and impact investor.
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