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Climate Transition and Private Equity

To finance the energy transition, one player stands out: Private Equity, reports Philippe Trainar.

Studies on the climate transition are multiplying, invariably repeating the message that this transition would require a significant investment. The very scholarly figures cited in these studies are dizzying. The Pisani-Ferry report thus evokes a consensus revolving around a total need for additional investment of around 2 to 3% of GDP per year until 2050 (€60-80 billion). However, in 2022, the European Union and its 27 Member States only contributed around thirty billion euros to finance the fight against climate change, to which must be added more than ten billion euros in private finance to help developing countries. Of course, these estimates of investment need are purely speculative. They are extremely fragile: who knows how much investment is needed to develop an economically viable decarbonisation technology? Who can quantify the investments needed to promote hydrogen as an alternative energy? etc. The only thing we can really be sure of is that we need a very large number of innovations to ensure a complete energy transition, which allows us to move away from non-renewable energies and ensure the success of the Net-Zero strategy.

Energy Outsiders

Decision-makers and experts now give the impression that they expect this transition from the actors in place. NGO lobbying thus aims to put pressure on large established companies, especially listed companies, to put in place credible strategies for an unconditional exit from non-renewable energies. The European taxonomy goes even further by proposing a typology of companies in brown and green. But all this is an illusion and “smoke and mirrors”. Have we ever seen large-scale technological innovations made from incumbents? Regardless of the means used to encourage these companies to do so, this objective is not credible. Innovation has always been made from outsiders and energy innovation will be made from outsiders or it will not be done. In fact, the technological breakthroughs of recent years have been almost exclusively made by unlisted companies, in university laboratories or in start-ups, particularly in California. In addition, breakthroughs made by established firms, if any, have come from separate entities, organized like start-ups. This is the alchemical secret of innovation. To forget this is to set oneself up for failure.

But how do we know today how much investment these start-ups will need to discover the low-carbon energy solutions of the future? This is indeed a question of bureaucrat or incumbent as the Anglo-Saxons nicely say, but not a question of innovator. We already don’t agree on what these solutions will be, how can we agree on the necessary financial amounts? This is why the climate transition does not involve the planned investment strategies of large companies and incumbents, any more than it does through traditional financing, in the form of reinvested earnings, the issuance of listed bonds or investment credits. It involves “private equity”, which is the only one capable of financing and then controlling risk-taking as significant as those presupposes by the climate transition, and this without any pre-established planning, which is by definition misleading. In a nutshell, private equity and its players are best placed to finance the climate transition and control its efficient management, while traditional finance and its players are unlikely to succeed.

Le Private Equity

The various actors involved were not mistaken, unlike the States and the lobbies. According to a recent study by White & Case, 40% of companies in the energy sector plan to finance their energy transition using private equity, while 45% admit that private equity would be their preferred option. They also consider that, far from being a long, quiet river, the climate transition constitutes a major risk in terms of competitiveness, which calls for specific modes of action, organisation and financing, adapted to the underlying technological challenges and the massive risk-taking that these challenges presuppose. It is clear that traditional savers and traditional shareholders, who are risk-averse, in line with their financial constraints, cannot be the financiers of the climate transition and the technological innovation that it presupposes. Rather, they belong to a narrower subset of investors, who not only like risk but also know how to control companies’ technological risk-taking, and which corresponds to “private equity” funds.