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8 steps to bring investors into the $1trn per annum needed to prevent dangerous climate change
Action is needed to make institutional funds flow: Sean Kidney shows how.
The CO2 emissions horse is about to bolt and we have yet to significantly deploy solutions that will enable us to stop it.
We know the investment required: the International Energy Agency (IEA) estimates that $1 trillion of investment in energy, transport and building sectors are required each year above business as usual. And according to the UN Environment Programme, if the sustainable management of natural resources such as forests, fisheries, agriculture and water is included, an average additional annual investment of $1.3 trillion is required out to 2050. But public sector balance sheets are, to say the least, constrained. So the bulk of the money is going to have to come from the private sector; in particular from the $75 trillion of assets under management by institutional investors. This is possible. Investments in climate resilient infrastructure from renewable power to energy efficiency projects typically involve high capital expenditure that creates secure and predictable long-term assets; very close to what pension funds and insurance investors are looking for. Investment in these assets have focused on equity; but bonds are a great funding instrument for such high cap-ex, long-life projects. Climate Bonds – asset-backed or ring-fenced bonds issued to raise finance for climate change solutions – have been developed as one means of tapping that market.
But funds are still not flowing. So how do we get some action? Here are 8 steps:
1. To create deal flow, think big.
Investors say there are simply not enough big deals. Bond markets want deal flow lumps of half to one billion dollars and investors will only buy if there’s going to be liquidity as a result of large volume issuance. The bigger the opportunities the more investors will be interested. In equities this is beginning to change with landmark deals such as PensionDanmark’s recent acquisition of a huge offshore wind farm from Dong energy. Bond opportunities remain scarce. One challenge is that both the renewable energy and energy efficiency markets are smaller in deal size than traditional energy sectors. Bond investors need scale, so smaller projects need to be aggregated into larger offerings. Banks providing project finance are recapitalizing and will do so increasingly under Basel III regulations. That means they are curtailing their smaller business and project lending. Other players, like utilities and governments, are similarly financially constrained. If banks and utilities are to be major players in growing the climate economy, they need to become project developers and financiers, dealing with the upfront risks of setting up new energy infrastructure. Then they should be flipping what will be low-risk assets and loan portfolios to institutional investors using equity and asset-backed security offerings, and aggregating smaller offerings to do so as well. Governments may
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