This post is a summary of my thoughts from a panel I participated on at the 2015 Social Finance Forum on November 12, 2015 in Toronto.
Climate change is a big problem, and it requires big money.
The World Economic Forum concludes that an additional (above-business-as-usual) $0.7 trillion USD per year in clean energy investment is required to transition to a low carbon economy.
If we invested the entirety of the assets under management from everyone at the Social Finance Forum, or even of every foundation in Canada, it would only make a small dent in our path to a low carbon economy. This is an all-hands-on-deck situation.
The good news is, over the past decade, pension funds, sovereign wealth funds, and other institutional asset managers that manage the bulk of global funds have been rapidly increasing their allocation to clean energy. Some are motivated by the ‘green’ elements, but largely they are attracted by the solid long term yields that these opportunities present.
Investors placed over $300B to build clean energy infrastructure last year, according to data from Bloomberg New Energy Finance. And just last week, Goldman Sachs announced that it will quadruple its allocation to clean energy by 2025, to $150B.
So in a $300B clean energy economy, what is the role for impact investors?
“Impact investment” is an umbrella term to describe investments that seek a positive social outcome as well as a financial return. Under this umbrella, different groups have different motivations and means to achieve their goals.
The “Divest-Invest” movement has encouraged investors to sell their stakes in fossil fuel industries like oil and coal, and to seek out climate positive investments.
Divest-Invest investors now range from large endowments like the $800M Rockefeller Brothers Fund, to individuals saving for retirement. With over $2.5 trillion committed to divestment, this movement is starting to have a global impact. The early adopters are extremely important: they are demonstrating that portfolios large and small can be fossil free, without sacrificing returns (the Rockefeller Brothers Fund actually exceeded its benchmarks after divesting from fossil fuels a year ago).
What unites this growing group of investors is a need for mainstream financial products across different asset classes that make it easy to not only eliminate exposure to fossil fuels, but also to invest in solutions. By increasing the demand for Divest-Invest products, these investors are compelling financial institutions to deliver, and ultimately driving more dollars into the low carbon economy.
Another group of investors, the Catalyzers, are focused on using their assets to bring about new solutions and new financial products before they reach the traditional markets.
Given that climate change requires trillions of investment dollars, the litmus test for these “Catalyst” impact investors should be “how does my investment unlock the next $100M from Bay Street?” Private investors play a crucial role in helping innovative companies or asset managers build a track record of attractive returns and reach sufficient scale to attract mainstream capital. The urgency of global climate change requires these players to think big, to help validate new business models and the ability of strong teams to execute and reach scale.
JCM Capital, is proving their team can generate great returns building utility solar and other clean energy projects in emerging markets. Their consortium of private investors is helping them get to the point where they will unlock the next $100M of institutional capital. Tom Rand and team at Arctern Ventures are demonstrating an exciting opportunity in clean-tech VC, and helping their portfolio companies reach global markets.
Similarly, investors in CoPower’s first two funds are helping us prove that community-scale clean energy infrastructure presents a compelling market opportunity, and that by leveraging an online investment technology we can simplifying green investing for all Canadians and unlock $100M+ of new capital.
Catalyst dollars are demonstrative and help prove out new opportunities. And then Divest-Invest capital can bring these new solutions to scale.