How Wall Street Can Save the Planet

The defining characteristic of the energy-climate challenge is its global scale. Trying to address it at the individual level can sometimes feel like (to borrow a timeworn but appropriate cliché) rearranging the deck chairs on the Titanic. One can recycle plastic bottles, ride a bike to work, change light bulbs, and use reusable bags for shopping. These are all great habits, to be sure. However, such well-intentioned efforts by individuals and households may well shrink to irrelevance, unless we put a halt to the inexorable rise of coal-based power across Asia, from China to the Philippines to Indonesia to Bangladesh to India. As Thomas Friedman bluntly puts it, "[T]he energy-climate challenge we face today is a huge scale problem. Without scale, all you have is a green hobby."

When it comes to clean energy, the deployment of technology matters as much as its development. The cleanest technology in the world will not make any difference to the climate change unless we deploy it en masse, on a scale that matters from a planetary point of view. Unfortunately, while we have many venture capitalists in Silicon Valley financing the latest advance in clean technology, we do not have nearly enough investors financing renewable energy projects in the fast-expanding economies of Asia. And this is the crux of the problem.

Emissions in the European Union and the United States have already peaked and will keep falling; the real fight is in the power sector of emerging markets. As Mohamed Nasheed, former president of the Maldives, observes, "What developing countries choose, in particular whether they power their growth with coal or clean energy, will dictate whether or not humanity can avert a climate catastrophe." Unfortunately, we do not yet see a renewable energy boom which is even remotely comparable to the property development boom in these countries.

What drives private investors is, of course, return. As long as the return expectation is high, money continues to pour in. Think of all the property developments in Dubai or Shanghai circa 2007, when almost half of the world's construction cranes were said to be operating in those two cities. The question is how to bring this kind of investment boom to the renewable energy sector in emerging markets, so that it may achieve the scale necessary to counter the resurgence of coal.

Which brings us to the role of financial services: The sector has been vilified for its short-sighted greed, but it has an opportunity to redeem itself (and also profit handsomely in the process) by addressing the challenge of financing renewable energy projects in developing nations. Right now it is quite difficult to find equity investors for these types of projects, because the perceived "country risk" is high. At the same time, however, expected return on equity also tends to be high -- usually in double digits, at least in terms of local currency -- so the challenge should not be insurmountable.

If our investment bankers and fund managers can come up with creative products which optimize the risk-return balance, then clean energy could present an ideal investment opportunity for long-term investors looking for stable high yields, with the added bonus that such investment will help save the planet. Innovation in finance got a bad name following the 2008 crash, but the whiz-kids on Wall Street can play a crucial, positive role in our quest for sustainable development, if only they choose to put their brilliant minds to it.