Clean Capital Investing & Climate Finance Trends Show Promise
25 April 2018
This renewables infrastructure finance space is getting a bit popular, or maybe even crowded, in a good way. When the behemoths start jockeying for a place in the climate finance arena, Wall Street suddenly pays attention. Both announced recently:
- Morgan Stanley’s new commitment to finance clean-tech and renewable energy efforts by investing $250 billion in low-carbon solutions by 2030. Commitment includes clean-tech and renewable energy financing, sustainable bonds and other low-carbon solutions. investwithvalues.com/news/morgan-stanley-announces-new-commitment-to-finance-250bn-in-low-carbon-solutions-by-2030
- The day before paying a $1 billion fine for unfairly charging their mortgage customers fees related to paperwork delays, Wells Fargo Bank then announced plans to put “$200 billion toward investment in, and finance of, companies and projects involved with clean technologies, renewable energy, green bonds and alternative transportation, by 2030. The funds will also go toward companies and projects focused on sustainable agriculture, recycling, conservation and other environmental activities, as part of a company-wide effort to support — and be part of — the transition to a low-carbon economy.” greenbiz.com/article/wells-fargo-pledges-200-billion-low-carbon-economy-projects
This builds on announcements already made by Wells Fargo rivals Chase and Goldman Sachs:
- Back in July 2017, JPMorgan Chase pledged to facilitate at least $200 billion in “clean financing” by 2025 (up from $100Bn in Feb 2015), and
- In 2015, Goldman Sachs promised $150 billion for clean energy projects by 2024.
This $800 billion so far is almost noise compared to what’s needed, but also represents just a slice of this ever-growing pie. Add to this In3’s opportunity to place CalPERS funds into US cleantech projects and we’re getting somewhere. But that said, according to the Global Commission on Economy and Climate, an estimated $90 trillion in sustainable infrastructure is needed between 2015 and 2030 for climate-safe growth (article | press release).
Historical or Hysterical? The answer is yes, definitely.
Overall, in 2017, investors poured $333.5 billion into global clean energy companies and projects, up 3% from the previous year, according to Bloomberg New Energy Finance (PDF). Not a bad showing. About 40% of this was in China, of course, and by renewables category, ~80% was invested in solar and wind power ventures, 15% in energy-smart technologies and the rest in bioenergy and other “low-carbon” products and services. What we really need is an explosion of interest and activity in carbon-negative (going well beyond “low” or even “zero” carbon) project finance.
To date, Morgan Stanley has financed more than $84Bn in transactions that support clean-tech and renewable energy since 2006. Since 2013, the Firm has underwritten sustainable bond transactions worth more than $27Bn, including the issuance of its own $500 million green bond in 2015.
By contrast, Wells Fargo Bank has invested a modest $6 billion in solar and wind farms across the United States, and it recently tripled its investment, to $30 million, in an incubator for clean-technology startups that it runs with the National Renewable Energy Lab (NREL).
Money Isn’t Everything, Right?
Right. All this points to In3’s approach of working with non-traditional investors such as family offices, pension funds and impact investors dedicated to particular purposes and investment objectives in focused markets. That is, not the aforementioned institutions, even as they clamor to jump on this bandwagon.
Why involve smaller, boutique, impact-focused firms? Because they value and understand the non-financial benefits of this work, with the better investors seeking to measure triple-bottom-line results as part of the value proposition. Financial-only returns still matter, of course, but increasingly the money only tells part of the story.
Corporate Climate Accounting, a Status Report
As of 2018, out of the $85 trillion of assets under management globally (roughly $1 trillion of which is in VC funds), $23 trillion incorporate non-financial information such as Environmental, Social and corporate Governance (ESG) data in their investment criteria, and according to Bloomberg, that figure is growing by 25 percent a year.
How is that possible? Why is it happening? Several reasons, all pointing to the mainstreaming of climate-related criteria in a broad range of economic activity, from seed-stage startups (some impact investors focus only on that extremely early opportunity) to a movement sanctioned by the G20-related Taskforce and the Climate Disclosure Standards Board (CDSB) to get large corporations (often the least responsible actors with the largest ecological footprints) to disclose their climate-related risks and liabilities using these as yet voluntary disclosure guidelines. See 2018’s Why Voluntary Climate Risk Disclosure is Going Mainstream
Another important statistic dates back to 2016 when a similar study showed not just consideration of ESG criteria but actual focus on it (“ESG and sustainability-focused investment accounts”), exceeded $8 trillion in assets under management.
The subset of so-called Impact Investors are probably better exemplars of this important shift in investment criteria, as prior studies by the Global Impact Investment Network (GIIN) show that more than 90% of the investors in this space regularly track the social and environmental impacts of their portfolio companies.
Released about the same time in 2016, this report on the Business Value of Impact Measurement addresses how impact measurement practices inform investment and management decisions, often indicators of risk exposures and five key drivers that influence long-term viability. For more, see studies at theGIIN.org.
What in the world is going on here?
The advent of “retail” Impact Investing has blown the roof off what was once an insular or even isolated space, limited to screening out the bad actors but ignoring the opportunities for doing good, at scale, through leveraging market forces. Impact Investing has been around, by various names, for decades. It was originally called Socially-Responsible Investing (more on how SRI differs), as shown in the following chart of the evolution of the space:
Only in recent years, during the period that Millennials have acquired a voice by virtue of their checkbooks, has there been a radical shift in the “conscience” of capital invested.
These days, with most startups founded by millennials, some 76% of them believe that businesses have the power to make a difference in the world. If that’s true, then why aren’t most startups socially responsible? Nobody’s perfect, but too few espoused values translate into purpose-driven “impact” ventures. Rodrigo Tavares provides some analysis of this in his recent article, 10 reasons startups should be socially responsible from birth.
Fortunately, more and more companies in today’s supply chains take some responsibility for sustainability. In the long-run, sustainability almost always yields dividends, but in the near term (such as quarterly earnings reports), not so much. Think of it as time-released value. It is often more of a cost, at first, that offers delayed gratification.
Why do so many VCs somehow disregard this trend? It can’t be just greed — profit-taking at the expense of all other species, right? You don’t s*** where you eat. What rationalization could possibly justify this continued head-in-the-hot-sand approach that trades off the future downsides for the immediate gratification of a miopic transaction? It couldn’t be just the dopamine rush, could it? (Sadly, that appears to be exactly what it is. Habits that favor what’s familiar over what works, a fundamental fear of change, intellectual laziness that stems from an inability to learn. Here’s to those of you who embrace change and turn it into opportunity!)
The prevalent idea today is that looking at the ESG profile of startups would be a deviation from other important indicators, such as founders’ profiles, financial models or market benchmarks. But with most startups dying while still in their infancy, we have to be even more thorough in the way we look at early stage companies in general. The aforementioned Tavares article offers a set of reasons why startup founders and VC fund managers should take corporate social responsibility more seriously.
Yes, we have come a long way and still have a long way to go, especially in Venture Capital, but also with project finance transactions, many of which disregard whether or not the investment will be good for people, society or the environment.
For example, why do some project developers and financiers support large-scale hydro power, with the known environmental issues from building reservoirs and destroying the natural ecology, displacing inhabitants, and causing irrevocable disruption of the surrounding communities? Zero disruption run-of-the-river hydro is now well proven, making large hydro obsolete. Here’s to all of you that take into account the full story when making decisions. Investing your values is the new IQ.
Daniel