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10 ways to generate $36 trillion of green investments by 2050

Leading low carbon group CERES outlines how $1 trillion a year for low carbon infrastructure can be generated

(Pic: DECC)

(Pic: DECC)

Download Investing in the Clean Trillion for CERES’ detailed analysis of how an additional $36 trillion can be raised to invest in clean energy

1. Develop capacity to boost clean energy investments and consider setting a goal such as 5% portfolio-wide clean energy investments

The heightened commitment resulting from a portfolio-wide goal would give investors the best chance of capitalizing on new clean energy-related opportunities across all asset classes, especially fixed income, as opposed to relegating this clean energy theme to just public equity or venture capital. Bolstering internal and external capacity for increased infrastructure investment, both directly and through other vehicles, will strengthen the potential to pair the necessary cash flows of clean energy infrastructure assets with investor liabilities and funding requirements.

2. Elevate scrutiny of fossil fuel companies’ potential carbon asset risk exposure

In a 2011 report, Mercer warned that climate-related government policies could increase portfolio risks by 10 percent over the next 20 years. The potential for reduced demand for fossil fuels driven by non-policy factors such as increased renewable energy, energy efficiency and fuel switching, also creates risks for investors who own fossil fuel companies. Investors should be paying increased attention to carbon asset risks by engaging with fossil fuel firms, including oil and coal companies, on the potential of higher cost, carbon-intensive fossil fuel reserves becoming “stranded,” thus creating long-term portfolio risks.

3. Engage portfolio companies on the business case for energy efficiency and renewable energy sourcing, as well as on the financing vehicles to support such efforts

Encouraging companies to aggressively pursue energy efficiency opportunities can help unlock projects with high returns, thereby creating shareholder value. By using more clean energy resources to reduce fossil fuel dependency and carbon emissions, companies will: 1) reduce vulnerability to volatile fossil fuel prices; 2) reduce exposure to future carbon regulations; and 3) identify new potential low-carbon business opportunities and customer solutions, leading to new revenues. All of these benefits underpin academic research showing that, over the long term, companies with leading environmental performance also deliver superior financial returns for investors.

4. Support efforts to standardize and quantify clean energy investment data and products to improve market transparency

Standardizing definitions of key investment terms, such as what constitutes a “climate bond,” will minimize the due diligence burden on investors and reduce transaction costs of investing in newer clean energy-related investment products. By reassuring potential buyers about what they are purchasing, standardization will also increase the liquidity of climate bonds and other products. Ultimately, better data on clean energy investment will foster easier, more precise benchmarking evaluation of potential deals.

5. Encourage “green banking” to maximize private capital flows into clean energy

Expanded issuance of climate bonds by multilateral banks will broaden the universe of highly-rated fixed-income products attached to clean energy, thereby making it easier for investors to increase allocations to clean energy within existing liquidity/creditworthiness constraints. Investment-grade credit ratings for project bonds, such as S&P’s recent approval of SolarCity bonds, will enable investors to capture the relatively higher yield of these instruments, especially relative to sovereign debt. The $2.5 trillion covered bond market offers attractive products for pension funds and insurers extra yield relative to sovereign debt, but with less risk than unsecured bank debt or asset-backed securities—and expanding this market into clean energy will increase such opportunities.

6. Support issuances of asset-backed securities to expand debt financing for clean energy projects

Asset-backed securities (ABS) for energy efficiency and renewable energy projects offer long-term, low-volatility yields that match well with the liabilities of insurers and pension funds. To reach a scale that is attractive to these investors, however, this market must overcome growing pains that are common to any new capital markets product. Key steps for achieving scale include:

1) minimize the due diligence burden on buyers of clean energy issues by standardizing terms for power purchase agreements

2) make future cash flows from such issues more stable

3) enable more accurate rating and pricing of such issues by providing more detailed historical data

4) limit downside risk for buyers of early clean energy ABS issues through credit enhancement by public or private banks.

7. Support development bank finance and technical assistance for emerging economies

Expanded risk insurance for clean energy investments in developing countries removes a key red flag on otherwise attractive investments. More generally, one of the ancillary benefits from helping emerging economies to embrace a low-carbon future may be significant new investment opportunities for foreign sources of capital. It’s worth noting that development bank financing creates $3-15 of private investment opportunity for every $1 of public funds deployed.

8. Support regulatory reforms to electric utility business models to accelerate deployment of clean energy sources and technologies

With a combined enterprise value of trillions of dollars, relatively low volatility and predictable earnings, the debt and equity of electric utilities have long been a significant share of institutional investor portfolios. But many trends are eroding the viability of traditional utility business models, which have long been premised on selling more power rather than helping ratepayers use less electricity.

As stewards of trillions of dollars of capital, investors have a strong interest in ensuring that electric utilities remain financially viable in a changing landscape, where energy efficiency and distributed renewable energy are becoming bigger factors. Supporting utilities’ transition to new, more sustainable business models will preserve the electric utility sector as a viable place for investors to put their capital to work.

9. Support government policies that result in a strong price on carbon pollution from fossil fuels and phase out fossil fuel subsidies

Climate change has the potential to harm long-term investor returns via 1) physical impacts, such as rising sea levels and more pronounced storms and heat waves, which can severely damage individual companies and entire economies; 15 and 2) the implementation of policies to reduce carbon emissions, which, especially if delayed for another decade or so, may come as a drastic and abrupt shock to company business models and economies at large.

Adoption of economy-wide carbon prices now helps to prevent both of these risks, and enables investors to plan prudently for the transition to a low-carbon global economy. More broadly, the adoption of carbon prices and removal of fossil fuel subsidies will create supportive tailwinds across all asset classes for low-carbon investments a nd headwinds for high carbon investments such as oil, gas and coal production.

10. Support policies to de-risk clean energy deployment

Policies that provide stable, long-term cash flows to clean energy projects that do not depend on unreliable and often complicated tax incentives will make clean energy significantly more attractive to institutional investors, especially as clean energy technologies approach cost competitiveness. Moreover, a focus on large-scale deployment will create investment opportunities of the size necessary for investors to justify building expertise in this new area. Finally, the lower project costs that come with increased clean energy deployment will stimulate more investment opportunities potentially worth trillions of dollars.

Download Investing in the Clean Trillion for CERES’ detailed analysis of how an additional $36 trillion can be raised to invest in clean energy

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  • Michael Casey

    11. Ensure Central Banks and financial regulators are mandated to support the transition to the low carbon economy. No Central Bank in Europe or the US is mandated to consider climate change or assist in mitigating it. Odd that given a) the financial markets hang onto every word the CB says and b) climate change is primarily an infrastructure finance problem. If Draghi or Yellen started talking climate both governments and financial markets would take mitigation seriously.