Innovation Needed to Reverse Cleantech Drop and Bring in Institutions

by Katie Gilbert

Michael Liebreich, CEO BNEF addresses delegates. Photo courtesy Ceres.

Michael Liebreich, CEO BNEF addresses delegates. Photo courtesy Ceres.

In 2014 investors running tens of trillions of assets gathered at the UN in New York to debate how to bridge the finance gap to combat climate change, writes KATIE GILBERT.

Despite a 12 per cent drop in cleantech investment last year and a still-unresponsive US government, institutional investors, state treasurers, and investment bankers appear to be finding reason for optimism.

The various reasons for this optimism were the subject of much discussion at a recent United Nations-hosted Investor Summit on Climate Risk in New York, which brought together nearly 500 investors representing tens of trillions in assets. The summit, convened by Ceres, the Boston-based sustainability advocacy group, in collaboration with the United Nations Foundation and the United Nations Office for Partnerships, sought to explore how investors can mobilize the vast amounts of capital needed to fight climate change.

The cleantech dip for 2013 emerged in figures released at the conference by Bloomberg New Energy Finance (BNEF), which found global investment in clean energy was $254 billion last year, down from a revised $288.9 billion in 2012 and $317.9 billion in 2011.

“The US continues to lack the political will to put a price on pollution,” said Scott Stringer, who assumed the role of New York City comptroller two weeks before the UN conference.

But, he continued – in an argument that was echoed by various panelists throughout the day – investors and other business leaders can’t assume they are powerless to address the looming threat of climate change in the absence of a carbon tax or cap-and-trade system. Indeed, much of the day was devoted to discussions of actionable ways to mobilize significant private investment in clean energy in the absence of government action at the federal level.

Stringer said that US states had been “inspiring laboratories of innovations,” citing California’s carbon trading market, and adding that for its part, New York is “anxious to do more”. Other panelists said the financial industry could sidestep the federal government’s sluggishness via financial innovation, citing the growth of the dynamic green-bond market.

“Let’s not just wait for policy,” said Mark Fulton, a senior fellow for Ceres: “Let’s get the cost of capital down, and appropriately price the cost of fossil fuels. I think that is the way forward.”

Michael Liebreich, CEO of BNEF, said 2013 had been a promising year for financial innovation, but that the industry would have to get more creative. He suggested that, for example, clean energy project investments could be packaged more like those in investors’ real estate portfolios, rather than mimicking infrastructure investment, as they more often do: “So many institutional investors are comfortable with real estate, but hold less infrastructure,” he noted.

Donald MacDonald, trustee director at the BT Pension Scheme, the UK’s largest corporate pension fund, echoed the complaint:

“There are not sufficient vehicles. We need to think about how we share risk, how we set up new investment vehicles.” He said the fund had allocated 5 per cent of its assets to infrastructure, with a bias to low-carbon projects, but it has only been able to invest a small fraction of that: “We’re competing against our colleagues to find appropriate clean energy investments. We’re not getting the right projects packaged up,” he said.

Cecilia Reyes, chief investment officer at Zurich Insurance Group, wished for “some intelligent way of breaking down the investments to give the risk to people who can absorb it, like development agencies. With that, we might be able to bridge the climate financing gap,” she said.

Investors and other business leaders can’t assume they are powerless to address the looming threat of climate change in the absence of a carbon tax or cap-and-trade system

Rob McCord, Pennsylvania’s treasurer, said the state is working on forging public-private partnerships that address the gaps financial services don’t yet fill for cleantech. But the next place financial innovation needs to focus on, he said, was the creation of secondary markets: “Products are nice,” McCord said, “but without secondary markets, you can’t get scale. Collectively, we need to invest in similar types of product, securitize them, and offer them to the market.”

Several panelists expressed optimism that this type of financial innovation is underway. Lisa Carnoy, head of global capital markets at Bank of America Merrill Lynch, pointed to the first public REIT designed to invest in sustainable infrastructure, launched by Hannon Armstrong Sustainable Infrastructure Capital.

Frank Pegan, CEO of Catholic Super in Australia, said a registry had been created to track low-carbon investments in the country, maintained by institutions who are willing to share their investment ideas with their peers.

Jane Ambachtsheer, global head of responsible investment at Mercer Investments, added that in the US, a handful of investors are overcoming some of the obstacles inherent to the space via the Cleantech Syndicate, a network of 13 family investment offices designed to make direct investments into private cleantech companies.

Taken as a whole, the various conference discussions were an exhortation to investors and the other financial industry leaders present to work within their own industry and design methods of moving the vast amounts of capital necessary to combat climate change: “This is the key moment for that type of work to take place,” Ceres’ Fulton said. “And we’re calling on you all to engage in that.