Investing with compounding creates magic. Einstein reportedly called compound interest “the world’s eighth wonder”. In certain instances, investments can multiply by a hundred times over. That is the power of compounding. Most often, this theory is applied to traditional investing and has always driven valuable returns for its patrons, but investing can also have an impact. Investing in our planet, the theme of this year’s Earth Day, provides an opportunity to green our planet while delivering handsome returns.
Green Investing is crucial to address climate change. For this, robust business models are essential for scaling, as they enable efficient resource allocation and attract investment for growth. The good news is that in the past decade sustainability has evolved from corporate social responsibility initiatives to a core driver of innovative and profitable business models. As a result, climate funding has attracted almost a trillion dollars in investments! This shift has fueled the growth of burgeoning and profitable industries such as renewable energy, e-mobility, and many others – all this while accelerating a net-zero future. Sustainability has transitioned from a “good-to-have” to a necessity, becoming a key component of future-proof careers and driving the greening of all jobs.
Interestingly, I stumbled upon a thread by GPT-4 discussing the best way to invest $100. GPT-4 took the user on a journey to build a product to help people shop more green. This was a testimony that maybe it was the best way to invest the 100 dollars, I mean if ChatGPT has to say it, it must be true!
But regardless, it’s incredible to see AI also thinking of ‘Invest in our planet’. This example highlights that impactful investments aren’t limited to large sums or traditional methods. As demonstrated by GPT-4, even small investments in eco-friendly products or technologies can significantly benefit the environment. Moreover, numerous platforms and investment vehicles offer socially responsible investing, enabling investors to support companies prioritising environmental sustainability. Interestingly, many sustainable investments outperform traditional ones. For instance, the EIP Climate Tech Index, launched by a top ClimateTech-focused VC, tracks decarbonisation-oriented companies and the index has surpassed the NASDAQ by almost 65% over the past five years!
Investing in our planet is one of the best ways to secure a sustainable future for ourselves and future generations. With the growing awareness of climate change and the need for environmental sustainability, investing in green technologies, renewable energy, and environmentally responsible companies has become a significant trend in the financial world. As my co-author, Garvita, wrote more about what each of us can do to invest in our planet last year, this time, I thought of taking a deep dive on one method of climate financing to give you a taste of what investing in our planet at scale looks like.
Blended finance is an approach to funding development projects or investments that combines public and private sector resources to leverage each other’s strengths and expertise. To give an example, a solar farm typically operates for 20 to 25 years and the investors start to break-even only after seven to 12 years. Now for a listed company that has to comply with quarterly reporting mandates, this is tough! These projects require high capital investments, long payback periods and are thus very risky investments for corporations. With the government’s support, blended finance can address the challenges of financing sustainable projects by leveraging public and private resources. It can offer longer-term financing and reduce perceived risk, creating a mutually beneficial outcome for both public and private stakeholders. The Rewa Ultra Mega Solar Park in India is a great example, combining debt financing from multilateral and bilateral agencies with equity financing from private sector investors to develop a 750 MW solar power plant. The project achieved several milestones and demonstrated the effectiveness of blended finance in mobilising private sector investment for large-scale renewable energy projects in India. Innovative structures such as this unite stakeholders and go a long way to help us reach net-zero.
Now although we have come a long way, a whole lot more funding needs to be deployed for our planet to reach net-zero by 2050. We have reached close to a trillion dollars every year, but as we reach 2025, we will require as much as 6 trillion dollars every year to meet our net-zero targets. While this may be hard, the magic of compounding will help. As the solar projects and battery innovations start to generate profits, reinvested returns from successful climate projects can be used to fund new projects and as more climate projects demonstrate profitability, more private investors are likely to be drawn to the sector. Also, as funding for climate projects increases, R&D in new technologies is also accelerated. These technological advancements can lead to more efficient and cost-effective solutions, enabling more projects to be undertaken with the same amount of funding. These drivers along with increased public awareness and government support will help us get to the much needed climate funding.
As we celebrate Earth Day, let us embrace the power of compounding in our investments to address climate change and create a sustainable future. By leveraging innovative business models, harnessing technology, and mobilising public and private resources, we can accelerate progress towards our net-zero targets, ensuring a greener planet.
(Garvita Gulhati is the founder of Why Waste?, a non-profit working towards water conservation. Shubhojit Ghose works in the renewable energy sector and was previously a Schwarzman Scholar from Tsinghua University)
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the organisation