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Working Paper | The Valley of Death and the Business of Asset Management

Richard L. Kauffman
Sustainable Finance Initiative
2021

While Marc Andreessen, well-known Silicon Valley investor and entrepreneur, famously observed that “software is eating the world,” combating climate change will require deploying hard assets to replace greenhouse gas producing infrastructure. To cite one example, the UN’s Intergovernmental Panel on Climate Change (IPCC) calculated that an annual investment of $2.4 trillion until 2035 will be needed in the energy system alone to limit temperature rise to 1.5 °C. By any measure, we are falling far short of mobilizing this quantum of capital. There are many explanations for this gap: clean energy is still too expensive relative to conventional energy, or put differently, returns are too low for clean energy; a lack of carbon pricing and generous subsidies for fossil fuels distort market flows; clean energy is still seen as risky technology; investors worry about uncertainties of clean energy support policy. To address the financing gap, there have been likewise a range of proposed solutions. Some solutions involve greater government investment through direct funds, blended finance structures, and new financing entities such as green banks. Other solutions have sought to change investor behavior through greater disclosure or through different investment vehicles such as green bonds or through Environment Social and Governance (ESG) funds.