Climate impact: Perspectives from investors

Where are investors seeing opportunities to further climate action and is the landscape transforming quickly enough?

As the effects of climate change have become all too evident and as governments and societies push for action and solutions, investors are scrambling for the opportunities this presents. But where are they allocating capital? What are the sticking points? And will we see transformation on the scale required?

Over the past few years, the drive for net zero has not only gained momentum, but a sense of urgency as more intense wildfires rage across the planet, ice caps melt faster than anticipated and average global temperatures look close to reaching tipping points. These effects of climate change have woken many investors up to the risks their portfolios face from events such as flooding and, at the other extreme, droughts. Yet the transition to a low or zero carbon emission economy also offers opportunities as policymakers increasingly seek to shift capital away from fossil fuels and towards climate-friendly solutions. Here’s snapshot of how private markets investor views are developing.

Private markets have an economic and moral imperative to act today.

“Back in the 1990s, private equity tried to hide behind its ‘private’ label and told people not to interfere,” says Jan Ståhlberg, Founder and Managing Partner of Trill Impact. “We’ve since sobered up and now we need to take leadership and be part of the solution. Impact investing offers a fantastic business opportunity, but it’s also a moral obligation. Young consumers will lead this; we can’t leave it to politicians, legislators and regulators because they are too slow.

We need to listen to our kids – they won’t change their opinions and these are very different from what older guys like me think. The view that investing in a business to generate a positive impact negatively impacts returns doesn’t hold any more. It may have been true back in the 2000s, but the facts and needs have changed since then. I am an impact investor and a capitalist – we won’t solve issues unless we make money out of it.”

2. Investors need to look to the future,
not the immediate past.

“What happened with the internet is not necessarily applicable to the energy transition,” says the managing partner of a real estate-focused venture capital firm. “We can actually learn more lessons from the post-industrial revolution. There is a real opportunity for investors who see this as a scalable deployment opportunity. Real estate will consume other sectors – there’s a need to spend US$18bn to decarbonise real estate alone, but then you have to add in other areas, such as gas stations, which need to be converted to charging stations. That’s an US$800bn industry in the US and it is now a real estate play.”

3. Energy transition will be a massive opportunity, but the road will be long and winding.

“The energy transition will see a rewiring of the global economy and it’s driven by technology, policy, and changes to consumer and investor preferences, leading to a mass reallocation of capital,” says Dickon Pinner, Head of Transition Capital at BlackRock. “It will mean switching out opex for capex. It is complicated and will take decades because we’re trying to rebuild and retrofit an economy that took 200 years to build. It will be multi-faceted and uneven and it will be characterised by volatility and uncertainty – price discovery has yet to come. It’s a huge opportunity, but it’s highly nuanced. Private markets will play a hugely important role because they enable companies to target capital to particular assets
with specificity.”

4. Yet capital is not always getting to where it needs to be.

“We saw US$1trn of capital allocated to climate in 2022, which is 35% higher than 2021,” says Pratima Rangarajan, CEO of OGCI Climate Investments. “But it’s not just about the amount of capital; it’s about directing it to where it can be most effective. Historically, a lot of climate capital has gone to areas such as electric vehicles, but concentrating it here isn’t the answer. We need to balance it towards higher emitting sectors that are usually overlooked because they are considered difficult. Yet those sectors can be addressed, and we already have solutions for them that are cost-effective.”

It's a point another investor also picks up. “Allocators should not make the assumption that the mobilisation of capital for the energy transition is commensurately aligned with where the capital should flow,” he says. “There are distortions and market inefficiencies. Real estate accounts for 40% of global carbon dioxide emissions and yet less than 5% of venture capital investment is going to into the technologies that could reduce this.”

5. We need new business models if we are to make climate solutions work.

“We see a lot of opportunity in distributed solar,” says Panos Ninios, Co-Founder and Managing Partner at True Green Capital Management. “But the challenge is that we need to create new business models. Our investments operate under the project finance model and this is helpful, but it is set up for investments of, say, £500m, not for £10m investments. That’s definitely a constraint. We’ve been working with banks to create frameworks to do this more easily, but we need new business and financing models because we need to move at pace.”

Rangajaran agrees. “We do need business model innovation,” she says. “Half of the innovations we need are already in existence; they just need to be deployed. For that to happen, we have to behave differently and put different models on the table. If we can be thoughtful about how we move forward, we can reduce the gap we think we have in addressing climate change.”

As Rangajaran says: “Two-thirds of the primary energy we produce is wasted – that’s all emissions.” This means there is significant opportunity in finding more efficient ways of producing, distributing and consuming energy.

“Energy efficiency doesn’t get enough attention,” says Michael Lewis, Head of Research ESG, DWS. “We need to target the buildings where we work and live because they produce 40% of our carbon emissions. This would have so many benefits in reducing fossil fuel consumption and emissions and increasing energy security. More efficient buildings have a lower default risk, higher valuations and better quality tenants. It is complicated, but the technologies to achieve this exist today.”

6. We are ignoring some of the easy wins.