Marshaling Investors for Clean Energy

Last month’s UN Climate Summit brought to light a powerful ally in the fight against climate change—investors. Nearly 350 of the world’s leading institutional investors representing $24 trillion in assets urged world leaders to adopt strong climate policies to stimulate investment in clean energy.

While calling for an assist from public policy makers, investors are not waiting for Washington and the UN to act. In the lead-up to the summit, for example, the California State Teachers’ Retirement System (the country’s second-largest public pension fund) announced it would more than double its clean energy investments to $3.7 billion, and the University of California committed $1 billion of its $91 billion endowment for direct investments in climate change solutions.

As the effects of climate change become more evident, investors are waking up to the economic risks of climate change and factoring those risks, and opportunities, into their investment decisions. The result is a growing wave of investor activity around the development of data and tools to measure and manage climate risk in portfolios, and to invest in the development and deployment of clean energy that helps mitigate climate change.

This wave of investment is called “climate finance.” It includes government incentives, public and private actors, and a range of financial instruments (such as debt, equity, and grants) that support the transition to low-carbon, climate resilient systems. Because climate change has such broad impact on the economy and on society, climate finance creates social value and is in effect a form of impact investing. Yet investments in clean energy have remained at the margins of what is often considered the practice of impact investing.

Today I, along with my co-authors, PRIME Coalition executive director Sarah Kearney, and Mission Investors Exchange executive director Peter Berliner, published a new report, “Impact Investing in the Energy Sector,” that explores the diverse set of actors and tools for investing with impact in energy. The report recommends specific actions the federal government can take to galvanize private financing for the creation and deployment of clean energy.

We believe it is critical to tie the interests of the impact investing movement to climate finance. Those at the forefront of impact investing—who are willing to take greater risks than ordinary market investors or who, in the pursuit of societal outcomes, make an effort to seek out opportunities that ordinary investors overlook—are what we term in the report “capital I” impact investors. There is another group of actors with a wide range of motivations and tools that we call “lowercase i” impact investors. This group includes mainstream institutional investors—those who operate under fiduciary boundaries and who seek to optimize financial returns—and tend to make investments at a scale orders of magnitude larger than the “capital I” group. To make the transition to a low-carbon economy the full spectrum of impact investors, both lowercase i and uppercase I, are needed.

In 2013, global annual investment in clean energy amounted to roughly $250 billion. To avoid the worst impacts of climate change experts say annual investment will need to double to $500 billion per year by 2020, and quadruple to $1 trillion per year by 2030. In contrast, the self-identified global impact investing movement—which includes all types of social impacts (a very small portion of which today is related to energy)—amounted to $46 billion of investments under management. When it comes to investing in energy innovation and deployment, we need a bigger tent.

A growing number of intermediaries—nonprofits, university researchers, and asset managers—are emerging to provide a strategic coordination function and to fill critical funding and information gaps in energy innovation and deployment. The Steyer-Taylor Center for Energy Policy and Finance, where I work, draws on Stanford University research to engage market actors on scaling up investment in clean energy. PRIME Coalition provides philanthropic foundations and family offices with the tools they need to invest in market-based solutions to climate change. And Mission Investors Exchange provides resources for foundations using investment strategies to achieve their philanthropic goals.

There is also a growing recognition of the important role that government can play in helping foster impact investing. The US Department of Energy and the White House hosted roundtables last spring and summer on impact investing. And the US National Advisory Board on Impact Investing issued a June 2014 report calling for “a more intentional and proactive partnership between government and the private sector” to sustain and grow the impact investing movement.

Public policy and capital markets are the only interventions large enough to mitigate climate change within a reasonable time horizon, and yet today their activities are not well coordinated. My co-authors and I hope our report will mark a meaningful step in organizing federal action and in clarifying the diverse set of actors and tools in the nascent field of climate finance.

Read more stories by Alicia Seiger.