The Impact Alpha: The climate-finance tipping point is here, and other blue-sky thinking



ImpactAlpha, May 17 – National and international news got you down? Take a break from You-Know-Who and consider that growth in clean-energy generating capacity continues to blow through even the most optimistic forecasts of a few years ago.

And if falling costs and improving technology aren’t enough to convince you that hockey-stick growth is here, another driver may: huge institutional investors such as pension and sovereign wealth funds are increasingly demanding low-carbon investments.

Growing demand from major institutional investors has in turn spurred global asset managers and intermediaries to boost the supply of low-carbon investment products that can absorb nine- and even 10-figure checks. Wind, solar and other clean-energy infrastructure projects are delivering long-term cash flows and stable, bond-like returns, while investment in storage capacity and smart-grid technology is surging.

Even the drumbeat of bad climate news – melting Arctic ice, increased desertification, more frequent hurricanes – could be good news for climate finance, as the risks of climate change become inescapably clear to “universal” asset owners with portfolios that span the global economy.

>>MORERenewables are no longer ‘alternative.’ Fossil fuels are ‘legacy.’

Looking back, it may be clear that the inflection point in climate finance came even earlier than it appears. Michael Eckhart, global head of environmental finance at Citi, dates it to 2013, when clean energy projects first tapped the bond market with solar securitizations, yieldcos, green bonds and more. “That was the watershed year,” Eckhart told me. “Now we’re just upscaling.”

Anyone looking to feed their confirmation bias might want to scan this month’s 60-page report from Ceres, “In Sight of the Clean Trillion.” With clean energy increasingly outcompeting fossil-fuel projects around the world, the report says, it’s feasible and achievable to reach the $1 trillion in additional clean energy investment needed every year to keep global temperature rise below two-degrees Celsius. In a cover note, Ceres’ head Mindy Lubber says the global clean-energy transition is “irreversible, unstoppable, and crucial to a sustainable future.”

And yet…. We’re not there yet. The estimated $333 billion in global clean energy investment in 2017 was actually below the 2015 level (falling costs meant that new generating capacity still increased by 15%). Less than 20% of the largest 500 investors had climate-change capacities within their organizations, and only a quarter of those – 22 in total – had staff dedicated to integrating climate-risk management into their investment processes.

That makes those early adopters crucial in spinning the flywheels of the global capital markets. Among the global 500 biggest investors, at least 19 already have at least 5% of their total assets in low-carbon investments, according to the Ceres report. The New York State Common Retirement Fund recently added $2 billion to an earlier $2 billion in a low-carbon index fund. CalSTRS has put $2.5 billion into a low-carbon index. The Dutch pension giant ABP has $3.5 billion invested in renewables and a pledge to nearly double that by 2020. Canada’s La Caisse de dépôt et placement du Québec has more than $16 billion in low-carbon investments, going to $24 billion or more by 2020.

>>MORE: Pension funds tell companies: ‘No excuses’ for inaction on climate change

Even a relatively few major asset owners can shift the direction of the market. Since the financial crisis, major pension and sovereign wealth funds have become more skeptical of the high fees and short-term horizons of many of their managers and are seeking to build their own capacity for low-carbon investments.

An investment advisor awkwardly named the Aligned Intermediary has recruited a dozen long-term investors that have collectively committed to deploy at least $1.6 billion in climate infrastructure. The investors include the endowment of the University of California, the New Zealand Superannuation Fund, Nuveen (formerly TIAA Global Asset Management) and the Ontario Public Service Employees Union Trust. Aligned Intermediary sources and packages clean energy and other deals for its partners.

>>MORE: Trillion-dollar question: How are the world’s biggest asset owners playing the risks ahead?

The demands of institutional asset-owners is creating its own supply. The mandates of asset owners is spurring asset managers to build up their own teams to execute on the new demands. As renewable-energy developers gain confidence that well designed projects will attract large-scale investments, they are putting in the upfront work to bring good projects to market.

There are a lot of really compelling deals out there,” said Ashby Monk, who heads Stanford’s Global Project Center and co-founded the Aligned Intermediary. Monk told me his team could deploy twice as much capital as has been committed. “There are only so many big institutions with an intergenerational time-horizon.”

As that changes, we’ll be writing the story of how global capital blew past the “clean-trillion” goal for annual low-carbon investments, just as renewable energy already is blowing through the best-case scenarios of a few years ago. I know blue-sky thinking can be dangerous. Right now, unwarranted pessimism is the bigger risk.

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