Follow the Money—Considering Climate in Energy Investment

Arguments continue about the impacts of climate change, but there’s little debate when it comes to where banks and other investors are putting their money.

Shareholders and institutional investors are pressuring companies to embrace clean energy. Financial houses and banks are ending their support for fossil fuels, directing their money toward renewable energy and technologies designed to combat climate change. Even oil and gas majors, such as BP, are moving away from their long-time core business to invest in renewables.

The European Investment Bank, the world’s largest multilateral financial institution, last year said it would phase out its multibillion-euro financing for fossil fuels within the next two years, becoming what it called the world’s first “climate bank.”

“Climate is the top issue on the political agenda of our time,” said the bank’s president, Werner Hoyer. “We will stop financing fossil fuels and launch the most ambitious climate investment strategy of any public financial institution anywhere.”

1. The potential future effects of global climate change include more frequent wildfires; longer periods of drought in some regions; and an increase in the number, duration, and intensity of tropical storms. Source: Shutterstock/NASA Global Climate Change

Fifth Third Bancorp, a major U.S. financial services company, in late September announced a new target of achieving $8 billion in sustainable financing by 2025. The company said its investments will include lending commitments and financing for renewable energy projects, including solar, wind, geothermal, biomass, and hydropower. Policymakers may argue over climate change (Figure 1), and some dismiss it altogether, but analysts who spoke with POWER acknowledge its impact on investing is very real.

“Climate change should be a major consideration in all investments going forward,” Ian Manchester, senior associate in Structured Finance at Distributed Solar Development, told POWER. “This includes industries from real estate to infrastructure, as well as the obvious power and energy market.”

Prioritizing Investments

Changing investment strategies may sound simple, but there’s more to it than just announcing a switch. Financial analysts say the market for investment products that are considered to be green or sustainable remains small, relative to the needs of investors. The absence of an economy-wide carbon pricing regime in the U.S. is a barrier (see sidebar), along with what analysts say is a misperception that investments in sustainable or ESG-focused projects—environmental, social, and governance—involve trading off financial returns when compared with traditional investment strategies. Investors looking at climate change impacts also should consider what technologies are being used to deal with issues caused by more powerful hurricanes, tropical storms, and wildfires, all tied to a warming Earth.

Analysts agree that due to continued regulatory uncertainty, government support is necessary to lessen potential investment risks in both traditional and new energy resources. That’s a particular problem in the U.S., where a change in the political climate likely determines whether climate change is even considered a problem. Constant wrangling over tax credits and incentives also muddies the waters.

“It is not only extremely complicated to discover and apply for C&I [credits and incentives], but we have found the invisible complication to be compliance. Most C&I take multiple years to monetize,” Laurence Sotsky, CEO and director of Incentify, an enterprise technology firm dedicated to realizing the financial and societal goals of C&I, told POWER. (Read a POWER Interview with Sotsky here.)

“The nature of large-scale innovation, whether it is renewable energy or discovering new medicine… requires major financial gaps to be crossed at the planning and pre-commercialization levels,” said Sotsky.

“Twenty years ago, you simply could not make the business case to invest $10 billion in developing electric cars vs. investing $10 billion in making gas-powered SUVs [sport utility vehicles]. But when multiple levels of government step in to bridge those gaps in planning, now you can move the market,” he said. “In some ways, I don’t even think that the word ‘important’ does justice to exactly how crucial C&I is to large innovation—it’s not important so much as it is necessary. Without C&I, the business case for innovation at a macro scale does not exist.”

Building a Portfolio

A climate change investment strategy can include support of green energy, or money backing companies that make infrastructure—like those involved with manufacturing batteries for electric vehicles. Another plan is to climate-proof a portfolio, a belief that a warming world will create economic disruption, and preparing for that eventuality.

“Some of the problems we face today could have been avoided if we had previously taken a triple bottom line [essentially ESG] approach to investing in the past,” said Manchester. “Given all that we know now, it’s time that we factor in the outcomes of our investments and get things headed in the right direction.”

The U.S. Commodity Futures Trading Commission (CFTC) in a September report said, “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” noting adverse climate already is impacting “infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity.” The CFTC report said that even the process of combating climate change—“which demands a large-scale transition to a net-zero emissions economy”—poses risks to the financial system, if market participants “prove unable to adapt to rapid changes in policy, technology, and consumer preferences.”

The CEO Climate Dialogue group has called on U.S. leadership to establish a “federal policy as soon as possible to protect against the worst impacts of climate change.” The group of 21 companies includes utilities such as DTE Energy, Exelon, Dominion Energy, Pacific Gas & Electric, Calpine, and PSEG, along with other energy companies such as Equinor, Total, and BP. They’ve joined with four environmental groups—Center for Climate and Energy Solutions, Environmental Defense Fund, The Nature Conservancy, and the World Resources Institute—to urge the president and Congress to enact a market-based approach to climate change.

2. Investments in technology include ever-larger wind turbines, including Siemens Gamesa’s 14-MW SG 14-222 DD. Courtesy: Siemens Gamesa

Environmental advocates say the financial community should proactively provide solutions to climate change, in part by being a catalyst for investments that promote economic resilience and the transition to a net-zero emissions economy. That could be new financial products and services, along with support for technologies that support cleaner energy (Figure 2).

Combating climate change does not come cheap. The International Renewable Energy Agency in 2019 said a technically and economically feasible path for limiting global warming to “well below” 2 degrees Celsius, in line with the Paris Agreement, would require an estimated $110 trillion of cumulative worldwide investment in the energy sector by 2050. ■

—Darrell Proctor is associate editor for POWER (@POWERmagazine).