Climate Finance Weekly: Investors place big bets on energy transition

Climate Finance

Climate Finance Weekly: Investors place big bets on energy transition

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Record capital flows flood into funds, but is there enough to achieve net zero?

The amounts of capital flows into purpose-driven investments today are truly staggering.

ESG bond issuance in 2020 totaled $732 billion while green bonds racked up $305 billion in sales. New money from investors captured by ESG funds in 2020 added up to $51 billion — more than double 2019’s total. Seventeen billion dollars was invested into climate-tech startups in 2020. At the bottom line, the total value of all sustainable investing assets at the end of last year was pegged at the impressive figure of $17 trillion. 

What’s more, the figures are projected to accelerate to even higher levels over the next two to three decades as more governments and businesses commit to net zero emissions targets by 2030 and beyond, to 2050. From public funds to private investment, it seems as if the money spigot is deluging the ESG, impact and socially responsible investing sectors with unprecedented velocity. 

Within the larger universe of environmental, social and governance issues, climate-related ones have been getting much of the attention for some time (although “social” investments are becoming increasingly popular recently). There are several internal factors: the COP26 gathering this November, warnings over the cost of continued extreme weather events, growing awareness of environmental risk factors to companies in several areas of operations, and intensifying interest on the part of the general public, from consumers to activists. Investors have tossed a match into that inflammable mix, and the market is exploding.

Some sample future sums in the offing:

  • $2 trillion: the amount being floated as the potential level of support for climate and clean energy infrastructure under the Biden administration’s climate change plan.
  • €1 trillion: the projected investment of European energy investors into renewables by 2030.
  • $350 billion: assets managed by 60 investors who have recently committed to new impact principles of the International Finance Corporation, a division of the World Bank.
  • $40 billion: the amount of loan funds allotted for the deployment of new, large-scale clean energy projects by the Department of Labor.

You get the picture. Big bets are being placed in the pricing of the energy transition, with strategies that predict big payoffs. 

While this robust response to the growing clarion calls of alarm to act and act now to mitigate climate change is heartening, it’s hardly problem-free.

Despite the vast sums, it’s not enough. 

To meet the Paris Agreement’s goals of net zero emissions by 2050 — which the Biden administration has affirmed ahead of COP26 — the U.S. will need to invest at least $250 billion in climate mitigation solutions each year during the next decade, a total of $2.5 trillion over the ten years. Globally, estimates to achieve the Paris targets are projected to require $3-5 trillion annually. 

At the average rate of $74 billion in climate finance put into action annually, the U.S. is not even keeping up with the losses rung up by climate-related disaster damage, which added up to $600 billion 2016-2020, another new record. 

The prevailing estimate is that the U.S. annual climate investment is less than a third of what is needed, according to the Climate Policy Initiative.

And on the other hand …  there’s almost an embarrassment of riches in investment dollars that have limited options to be activated. There are simply not enough opportunities (i.e. financial products) available at this time to absorb this unprecedented flood of cash. 

The market is beginning to respond: A record number of ESG-ETFs, 31, were launched by asset managers in 2020, nearly double last year’s total, bringing the total number of products in the U.S. to more than 100, according to Elisabeth Kashner, director of ETC research at FactSet. These products absorbed a record $27.4 billion.

And more are on the way: A BlackRock survey of 425 asset managers who oversee some $25 trillion in assets found that they plan to double their sustainable assets under management to an average of about 37% of their portfolios over the next five years, reports the Wall Street Journal

But an exponentially larger number of funds will be needed to absorb the $23 trillion in climate investment opportunities in emerging markets by 2030, claims the International Finance Corporation. That’s one high benchmark.

Other obstacles abound. The ongoing clamor for a common ESG investing standard is reaching a crescendo, driven by the large inflows of capital. Full deployment of investments is being hindered by a lack of accepted universal metrics and concerns about how previously non-material factors such as climate risk affect fiduciary duty requirements to shareholders.

The latest development is that the Treasury Department and U.S. regulators are in “the early stages of working on measures to address climate-related metrics for ESG investing,” reports Bloomberg. The conversations include potential recommendations by the Securities and Exchange Commission for how companies are to report their environmental impact. An SEC rule that would “boost demand for assets that tackle climate change” would be a game-changer for financial markets.

Speaking of disclosure … Ceres has just released the Climate Action 100+ Net-Zero Company benchmark. It tallies the “first detailed comparative assessments of individual focus company performance” on its high-level commitment goals, including strengthening climate-related financial disclosures. Significantly, it “standardizes what constitutes a net-zero aligned business strategy and how to measure alignment with the Paris Agreement goal of a 1.5˚C transition.” While there are questions about whether any one standard can fulfill the multiple needs of investors with varied interests and aims, any effort at standardization that promises to bring order to the new, wild frontier of ESG investing seems to be a promising advance in practice.

The Climate Action 100+ is made up of more than 570 investors representing over $54 trillion in AUM. That’s a big lever to drive change. While spearheaded in the U.S. by Ceres, the group is, most importantly, a global consortium of five regional investor networks: Ceres, the Asia Investor Group on Climate Change, Investor Group on Climate Change, Institutional Investors Group on Climate Change, and Principles for Responsible Investment. Reducing emissions is a worldwide issue and requires a comprehensive, planet-wide program. 

To say that achieving the Paris Agreement goals by 2050 is a big challenge is an even bigger understatement. That’s why the sums being projected to meet those goals are so huge — and why more will be needed.

Written by

John Howell

John Howell is a writer, editor, and broadcaster who oversees the Climate Finance Weekly newsletter and advises on communications and media strategy. He was co-founder, editorial director, and chief of thought leadership for 3BL Media, for which he managed all original editorial content, wrote, and edited newsletters, and created the Brands Taking Stands initiative. He has worked as an editor and contributor for Elle, Artforum, and High Times magazines, developed new media for Hearst Magazines, and created communications for Calvin Klein, Polo/Ralph Lauren, and The Body Shop. He lives and works in New Hampshire and Maine.