In the press, News Article

Climate change: ‘We need private capital’ for riskier green projects, Apollo co-founder says

GLASGOW — Craig Cogut made a name on Wall Street as the co-founder of Apollo Global Management, amassing a fortune on distressed-to-control takeovers and lucrative real estate deals.

These days, he’s more interested in a different kind of distress: The climate crisis and opportunity to build resilience in the Global South.

“If the goal is to address climate change, we don’t need another electric car company in America,” Cogut told Yahoo Finance. “It’s better than investing in an oil company — but if we’re trying to deal with climate change, we need private capital, ultimately, to push the envelope and take more risk.”

From an agroforestry project in Uganda to eco-tourism in the Galapagos Islands, Cogut noted that he is deploying both personal capital and that from his private equity firm Pegasus Capital Advisors to tackle the impact from warming temperatures in countries most affected.

Pegasus Capital recently launched a $625 million global fund for coral reefs in partnership with the Green Climate Fund (GCF) that is dedicated to conserving and restoring coral reef ecosystems. GCF has already made an initial commitment of $125 million, intended to de-risk and unlock capital.

Cogut’s presence at the UN Climate Change Conference, also known as COP26, in Glasgow also points to a shifting view on climate financing among private equity firms and asset managers. The thesis isn’t just about investing in the planet’s future but generating returns in some of the world’s poorest countries, as the world races to achieve carbon neutrality by the middle of the century to avert a climate catastrophe.

A $23 trillion investment opportunity

Governments are lining up to seek partnerships on the sidelines of COP26 in hopes of securing funding to pay for everything from the closure of coal-powered plants to the development of wind and solar farms and investments in new technology that will pave the way for an economy without fossil fuels.

In all, climate-related projects in emerging nations amount to a $23 trillion investment opportunity, according to a report by the World Bank’s International Finance Corporation.

“To do this right,” Cogut said, “we have to do two things: We’ve got to generate returns and we have to have the impact.”

The private sector is being urged to take on a bigger role in the push to net-zero emissions, in part, because governments have struggled to meet their own commitments. While the world’s richest nations pledged to commit $100 billion a year in climate finance to developing nations during Copenhagen talks in 2009, estimates show they’re unlikely to meet that promise until at least 2023.

Emerging nations say they’re unfairly tasked with addressing a problem largely created by greenhouse gas emissions spewed by the most advanced nations including the U.S. while their own countries take the brunt of the impact.

“Some of the most vulnerable countries to climate change basically are now suffering one large cyclone every three, four, five years. One cyclone can wipe out 50% of your GDP,” Yannick Glemarec, GCF Executive Director, the world’s largest climate fund, told Yahoo Finance.

Glemarec added that many countries “have no fiscal space in order to be able to promote this kind of immediate investment we need in climate change.”

Growth in blended finance

GCF is helping to mobilize private capital through a blended finance model that de-risks investments in climate projects for private firms hesitant to take on risk in largely untapped markets.

Put simply, the South Korea-based fund offers junior capital to ensure upfront costs for green investments, which are paid for by taxpayers in developing countries while private firms pick up the rest of the bill.

The fund has deployed capital to 127 countries, with projects valued at more than $37 billion combined. Glemarec said demand has grown over the last year as countries emerge out of the pandemic shouldering even more debt.

“We use taxpayer money as a catalyst to leverage much, much larger flows,” Glemarec said. “We are working with the private sector to develop new investment appraisal methodologies that basically includes the physical and transition risks of climate change in the investment so that you offset the higher upfront cost of green climate-resilient projects with the lower operational costs.”

Former Bank of England Governor Mark Carney, who is now UN Special Envoy for Climate Action and Finance, highlighted blended finance facilities as key to tackling the scale of the crisis on Wednesday.

“We needed blended finance facilities that don’t mobilize fractions of private capital for the public dollar but multiples and double digits for the public money,” Carney said. “Quite frankly, facilities that do not scale up to $100 billion a year and additional flows aren’t relevant to the scale of the problem.”

‘Leading corporate players see opportunities’

The Biden administration, for its part, has committed to quadrupling its annual contribution to $11 billion a year by 2024.

But Jake Levine, Chief Climate Officer at the U.S. International Development Finance Corporation, admits that amounts to a small dent considering the estimated $150 trillion price tag of a three-decade-long transition.

“Most growth needs to be focused on ​using public finance to mobilize investment ​from the capital markets,” Levine said. “Companies are chomping at the bit. Leading corporate players see opportunities.”

However, commercial banks have largely stayed on the sidelines. On Wednesday, Carney signaled a change by announcing that financial institutions with $130 trillion in assets had pledged to prioritize investments combatting climate change in the coming decades.

Cogut blamed slow action from major banks to risk aversion and a focus on short-term profits, saying: “CEOs think in quarters, not years.”

Rajiv Shah, President of the Rockefeller Foundation, is hopeful the success of these funds will ultimately nudge big banks to the long-term opportunities. The Rockefeller Foundation recently launched a $100 billion global energy alliance, in partnership with the IKEA Foundation and Bezos Earth Fund, to mobilize public and private financing for the transition to clean energy.

The $500 million grant commitment is the single largest philanthropic grant or investment the foundation has made in 108 years, according to Shah.

“Foundations and philanthropies like ours can invest in big bold efforts and take a lot of the risk out of the system for a lot of other types of institutions that can then work with us to help people who are in vulnerable countries,” Shah said. “That ability to take risk can really be transformational in what we’re all trying to do.”