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In recent years,climateChanges have brought huge challenges to the sustainable development of mankind. As an important part of green finance, climate investment and financing are closely linked to the urgent need for global and Chinese response to climate change. As the problem of global warming becomes increasingly serious, countries around the world have set carbon neutrality goals.

In this context, what challenges and opportunities does climate investment and financing currently face? What role does climate investment and financing play in promoting the realization of my country's "dual carbon" goals? What methods do investment institutions usually adopt when conducting climate investment and financing? What measurement indicators or evaluation criteria will they consider?

Recently, in response to the above topic, Mingde Investment founderLi ShuangxiaExclusively written for NetEase Finance ESG.

Mingde Investment was initiated and established by the Asian team of Schroders Capital, an internationally renowned fund management company, focusing onenergyThe technological/engineering breakthroughs in the process of industrial structure transformation have formed an investment portfolio system with depth and breadth in the new energy industry chain, and formed an industrial ecology in sub-sectors such as hydrogen energy, perovskite, energy storage, virtual power plants, batteries, and electronic controls.

Ms. Li Shuangxia is the founding managing partner of Mingde Investment. She has 16 years of experience in direct investment and fund of funds management. She has served as the head of China investment business of Adveq (now Schroders Capital) and a member of the global direct investment team. Since the establishment of Mingde Investment, she has co-founded or led investments in hard technology companies including Antai Composites (a supplier of carbon fiber structural parts for German aerospace), Lanxing New Energy (a British hydrogen energy solution provider), Tianyu Aviation (a large UAV and manned general aviation company), Degao Chemical (display chip packaging materials and processes), and Zhiwei New Energy (high-performance micron silicon-carbon negative electrode materials).

Produced by | NetEase Finance ESG

Author | Li Shuangxia

The origin of climate investment and financing can be traced back to the signing of the United Nations Framework Convention on Climate Change in 1992. Since then, global attention to climate change has gradually increased. The signing of the Kyoto Protocol in 1997 and the Paris Agreement in 2015 further promoted global climate action and provided a policy basis for climate investment and financing.

Among them, the Paris Agreement is particularly critical, as it sets a global temperature control target of limiting the rise in global average temperature to within 1.5°C above the pre-industrial level. Against this background, my country actively responded to the call and issued the Guiding Opinions on Building a Green Financial System in 2016, officially starting to build a green financial system.

In 2020, my country proposed the "3060" dual carbon target, namely the "carbon peak" and "carbon neutrality" targets. In the same year, the Ministry of Ecology and Environment and five other departments issued the "Guiding Opinions on Promoting Investment and Financing to Address Climate Change", which clarified the overall requirements, policy system, and standard system of climate investment and financing.

Breaking through the “impossible triangle” under the constraints of climate goals

The premise for climate investment and financing is climate anomaly. The emission of greenhouse gases has led to various extreme weather phenomena and environmental problems around the world. The root cause is the imbalance and disorder between the industrial structure, energy structure, resource utilization methods and development speed. The resulting "externalities" are borne by all mankind.

Climate investment and financing is also a kind of political economics. Usually we only look at the total annual emissions, but ignore the cumulative emissions. In fact, before China announced its dual carbon goals, as of 2019, the EU and the United States had accumulated more than 280 billion tons and more than 410 billion tons of carbon dioxide emissions, respectively, both higher than China's 220 billion tons. Europe and the United States also reached their carbon peak much earlier than China, having achieved their carbon peak in the last century and the beginning of this century, respectively. Even if the timetable for carbon neutrality in Europe and the United States is set at 2050 and China is set at 2060, China only has 30 years from peak to neutrality, which is much shorter than Europe and the United States.

Therefore, a clearer timetable means more rigid climate constraints. Economies in the rapid stage of industrialization will inevitably be subject to certain constraints. They will need to achieve balanced development under the dual goals of economic growth and climate ecology, industrial upgrading and green premium, and current interests and future interests, which is more difficult.

According to the previous development path of developed countries, it is impossible to achieve the above goals at the same time. After more than 20 years of unremitting efforts, Chinese enterprises have basically achieved green energy prices, mainly photovoltaic and wind power, parity with or lower than fossil energy prices on a global scale through rapid technological iteration and cost reduction, breaking the impossible triangle for the economic development of developing countries and regions. This is an epic contribution made by Chinese enterprises to curb climate change and global green energy transformation.

Deeply tap into the resource endowment advantages of the west to achieve industrial upgrading

The vigorous development of climate investment and financing has promoted a number of low-carbon, energy-saving, emission-reduction,clean energyTechnology has moved from the laboratory to the market. Based on domestic and international practices, it has accelerated technological innovation and application. For example, hydrogen energy, as a clean energy to replace fossil energy, has moved from the aerospace field to the vast civil and large industrial fields. Another example is the establishment of a carbon market and carbon credit mechanism, which has accelerated the progress and application of green fuel technologies such as biodiesel and green jet fuel.

In some areas where my country already has manufacturing advantages, climate investment and financing have accelerated the scale of these industries and the adjustment of energy structure. The installed capacity and power generation of renewable energy such as solar energy and wind energy have grown rapidly. Renewable energy has accelerated its parity with coal-fired power. After crossing the parity critical point, it has in turn further promoted the continued increase in the share of renewable energy.

It is worth mentioning that the central and western regions have resource advantages in upstream clean energy resources and application scenarios. A large number of companies, especially large companies in the energy field, have begun to increase the development and utilization of clean energy in the central and western regions, resulting in the gradual gathering of upstream and downstream supporting companies in the industrial chain. In this sense, climate investment and financing has accelerated the industrial upgrading in western my country.

In the above process, climate investment and financing capital has played a vital role, whether as venture capital or as debt-based funds.

Layout of "green" investment from the bottom up

For investment institutions such as Mingde Investment, green, clean and low-carbon are undoubtedly the first things to consider; the second is the relative cost of technology. Even if there is still a certain "green premium" at present, there must be room for significant cost reductions in the foreseeable future.

Another important criterion is the potential for scale. Scaling is the fastest way to reduce costs. If a technological route is very advanced, but a certain link in the industrial chain has been stuck for a long time, or a complete industrial chain supporting system cannot be formed, it will be difficult to form large-scale mass-produced products.

At the same time, we particularly prefer teams with technical and R&D backgrounds. Entrepreneurs have clear iterative ideas and strong execution capabilities. Even if there are some shortcomings in market development and management, investors can make up for them to a certain extent.

In actual operation, energy investment needs to be considered from the perspective of the entire industry chain and the background of the global energy supply and demand pattern. One of the challenges is that the supply side and application scenarios have a relatively large geographical span. Traditional investment strategies mainly focus on the project side (supply side), but tend to ignore the downstream market, application scenarios and other aspects, and thus cannot have a deep understanding of the technology. We are more likely to look for the technology needed by the market from the downstream, which requires a deep enough understanding of the application scenarios. For example, in the western or Middle Eastern markets, we need to take root for a long time and integrate into the local industry to truly understand what technology and products are needed locally and help the invested companies achieve faster growth.

Secondly, the energy transition involves a very long industrial chain. The replacement of one key material may affect the performance of other materials, which will affect the entire system. We must systematically understand the logic of product iteration, put it in the context of the future global trade system, and reversely deduce the choice of technical path, so that we can make a reasonable layout at the moment.

Green investment and financing needs to have a global structure

According to our observations, there are several differences between foreign countries and China in terms of climate investment:

First, compared with the domestic market, the themes of climate investment and financing abroad are very clear, especially in Europe, where it is relatively easy to raise funds for climate and energy-themed funds, and investors' recognition and awareness of investment directions in this field are much higher than in China.

Secondly, the foreign climate investment and financing market is more diversified, with more products and tools. Some climate funds and green funds are also more tolerant of early technologies.

Third, the influence of foreign carbon markets and carbon tax mechanisms is greater. Some cutting-edge technologies, such as direct air capture and biomass aviation fuel, are still not economical from the current cost perspective. However, after considering the impact of carbon markets or carbon taxes, the business logic can be self-consistent to a certain extent.

Fourth, from the perspective of capital investment, the European and American markets prefer software projects, while China prefers hardware and manufacturing. The reasons behind this include business model and profitability. However, we are gradually seeing the trend of software and hardware integration infiltrating at home and abroad. Some industrial capital in Europe has also begun to care about energy security and independence, and hopes to build a more large-scale manufacturing system locally. Chinese companies and investment institutions hope to find more high-value-added areas to break the "involution" pattern.

Looking ahead, cross-border capital flows will be an important trend, and cross-border funds and projects will increase. This is determined by the resource distribution characteristics of clean energy itself. Investment institutions in the climate field must have an international structure in order to be competitive.

New climate investment and financing products and services will continue to emerge, such as biodiversity bonds, innovative financial products based on carbon assets and carbon credits, and cross-border capital market connection mechanisms, which will bring new investment opportunities for the scale and internationalization of climate investment and financing.