2030 Finance | July 28, 2020

The world is arriving at where climate investors have long been

Christian Zabbal
Guest Author

Christian Zabbal

ImpactAlpha, July 28 – Much has been written about the link between Covid and the environment, and how Covid will prompt a new interest in forestalling the next crisis, climate change. Last week, for example, the Biden campaign unveiled  a fairly bold climate plan: carbon-free energy in the U.S. by 2035. That news came just a couple of weeks after Amazon announced a $2 billion clean fund.

A significant portion of my professional life is devoted to fighting climate change, be it as the co-chair of CREO, an association of large family offices investing in the space for returns and impact, or as a private equity manager. There are many, many of us who have made climate change a priority in our career. It’s not always fun – we still often talk to audiences that still believe that “someone else will deal with it” or that investing in climate means, somehow, taking a hit on your returns.

For years, we have pushed for clean energy mandates, raised money to invest in startups that offer solutions that address climate change, and generally evangelized the need to create sustainable solutions to our biggest threat as a civilization. The goal of these efforts was to create an environment where clean and green become the mainstream, rather than the niche alternative, and investing in climate-friendly solutions becomes the financial imperative, as opposed to the ‘bold choice.’

So, with climate back in the headlines, the question does pose itself, after all that effort: How are we doing? Are we winning?

Global dashboard

On the face of it, we are not. If we had a dashboard for high-level indicators of our future, the dials would be flashing a desperate shade of red and horns would be blaring. Read some of the dials: the planet is warming at around 0.4 degrees per decade (and accelerating), starting to make parts of the Earth uninhabitable. The oceans are being overfished by  0.7% per year, the seas are rising by 3 millimeters a year, and the costs to maintain our infrastructure in the face of this is spiraling rapidly into the hundreds of billions. Oh, and we’re losing around .05% of all species every year. On its current trajectory, the future is looking fairly dystopian for our children and us.

And yet, something has shifted in the last few months. Deep within the dashboard, some of the smaller lights have changed colors, and not for the reasons most of us thought.

Weighting accounts for impact

Firstly, and perhaps most importantly, the dials that track ‘zeitgeist’ and perception are shifting. Climate marches brought millions in the streets last year. Millennials and Gen Z are coming into their own and pushing for change faster and more dramatically than their elders. Governments have listened, finally:  Covid stimuli in most countries are doubling as “green stimuli”, sovereign funds are divesting from fossil fuels, and legislators are starting to ban petrol cars (albeit in the 2030-2040 time frames). Pension funds have begun keeping ‘carbon budgets’ which can directly impact their investment professional’s compensation if they are exceeded.

On the supply side, some of the dials are moving as well, as efforts made over the past decades start to pay off.  After years of deployment and innovation, solar and wind energy are now cheaper than coal in about 70% of the globe. As a result, they are replacing coal and even gas in many countries. Hawaiian Electric just announced $4 billion of renewable energy projects, for example.

Climate makes a comeback in coronavirus recovery plans (just don’t call it climate action)

The indicators are not isolated to energy alternatives – across many, many markets, the growth is almost entirely in sustainable, low-carbon alternatives to the status quo. New Jersey is setting up a green financing arm to invest in green infrastructure to build some of these projects, following New York and Connecticut and bringing the committed capital to $15 billion. Electric cars are growing by 63% a year, while traditional cars chug along at less than 5% a year. The global food market is growing at 4% a year, but the sustainable food market is growing more than 3X that, 15%. Same for sustainable fisheries and green chemistry suppliers.

Virtuous cycles

These rate differentials have caught the attention of the private finance world as well. More and more capital is being allocated to ‘green’ solutions and funds – more and more managers are focusing on that space every quarter. Some of that, of course, is driven by a desire to mitigate catastrophic climate change. But much of it is a recognition that the sustainable alternatives, in more and more verticals, is where the growth will happen over the coming decades. Tesla is now worth more than all the incumbent US car companies – combined. Cambridge Associates now show that cleantech returns outperform, for the first time, their non-clean private equity/venture capital returns.

Speeding down the road to electric vehicles, powered by China

This is what a virtuous cycle looks like: more capital flowing into alternatives to carbon-heavy industries, creating options that respond to increasing public pressure to address climate change, which create success stories like Tesla that draw in further capital and shift public opinions more…

This is why some of the smaller lights at the back of the dashboards have changed colors over the past year or so. And Covid, by giving us a preview of what a true existential threat could look like, has helped move the dials a bit faster.

So. Are we winning? No. Not yet. But in every war there is a moment when the winds shift, and the final outcome can be glimpsed. There are no reinforcements today coming for coal and petrol cars and open-ocean rogue fisheries and large-scale plantations, while there are a thousand startups, billions of capital, and 80 million millennial consumers coming online on the side of sustainability.

It will take years, decades, and untold more damage and toil before the war is over, but the balance of power has shifted now. More and more dials will turn to green, triggering more dials, and more dials, and so on. The final victory will belong as much to the parents who taught their children about climate change, to the journalists who wrote about them, and to the politicians who led as to the investors and entrepreneurs that drove the change.

Christian Zabbal is a managing partner with Spring Lane Capital.