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January 23, 2014

How to Fund Clean Energy Investment
    by Robert Kropp

A report released by Ceres at the recent Investor Summit on Climate Risk suggests that the responsibility for scaling up clean energy finance to the necessary level is shared by institutional investors, banks, and policymakers. Third in a three-part series.

SocialFunds.com -- Among the many highlights of last week's 2014 Investor Summit on Climate Risk was the publication by host Ceres of a report entitled Investing in the Clean Trillion: Closing The Clean Energy Investment Gap. The report is straightforward in stating where much of the trillion dollars of investment in clean energy must come from: institutional investors, which collectively manage about $76 trillion in assets.

A 2012 International Energy Agency report stated that $36 trillion in global investment in clean energy will be required by 2050, a total which averages out to $1 trillion per year until then.

Unfortunately, the report tells us, the levels of investment in clean energy by institutional investors are nowhere near the amounts necessary to minimize the effects of climate change. “Only $22 billion of asset finance for clean energy came from pension funds and insurance companies,” the report states, “or less than 2.5 percent of total clean energy asset finance globally over this period.”

“Boosting these capital allocations to clean energy is essential,” the report continues. “Elevating these levels, however, requires that key institutional investor considerations be met: investments must provide competitive risk-adjusted returns that suit their varying risk preferences, regulatory requirements and credit/liquidity constraints; they also must align with their long-term fiduciary duty to their beneficiaries.”

The report provides ten recommendations for boosting clean energy investment by institutional investors to the necessary levels. Four of the recommendations address institutional investors directly. A portfolio-wide goal—of five percent, the report suggests—“would give investors the best chance of capitalizing on new clean energy-related opportunities across all asset classes.”

Engaging with fossil fuel companies over the long-term risks associated with stranded assets would build upon the early efforts of sustainable investment firms during the 2013 proxy season. Stranded assets refer to the fossil fuel reserves that will have to stay in the ground if global temperature increases are to be limited to two degree Celsius, the level of increase agreed upon by national governments in 2010. During the 2013 proxy season, Unitarian Universalist Association (UUA) filed shareowner resolutions at two of the nation's largest coal companies, requesting that they report on the implications of stranded assets.

Also in 2013, a coalition of global institutional investors organized by Ceres requested that 45 of the world's largest fossil fuel companies report on the implications of stranded assets before the onset of the 2014 proxy season.

The other recommendations directed to institutional investors address engagement with portfolio companies on energy efficiency, and supporting the standardization of clean energy investment research.

Three of the report's recommendations address actions that banks can take to encourage more investment in clean energy. Shortly before the summit, Ceres announced the launch of the Green Bond Principles, a set of “voluntary guidelines on recommended process for the development and issuance of Green Bonds.” Thus far, 13 major global investment banks have stated their support for the voluntary Principles.

The report states, “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.”

Also, “issuances of asset-backed securities...for energy efficiency and renewable energy projects offer long-term, low-volatility yields that match well with the liabilities of insurers and pension funds.” And expanded risk insurance for clean energy projects in developing economies will tap into a market that Michael Liebreich, CEO of Bloomberg New Energy Finance, said is “coming on board very rapidly.”

On several occasions during the summit, Mindy Lubber, president of Ceres, emphasized the necessity of policy reform in order to minimize the risk encountered by institutional investors as they ramp up their clean energy investments to the levels required. While this reader of the report found that it suggested institutional investors could be doing more even under current policies—indeed, that it may be their long-term fiduciary duty to do so—the reality is that until governments fully acknowledge the gravity of the the climate crisis and reform their policies, investments in clean energy will remain insufficient.

A price on carbon will help institutional investors avoid the financial risks associated with climate change, and doing so as soon as possible will help the global economy avoid the shocks inherent in delaying the measure. “Adoption of economy-wide carbon prices...enables investors to plan prudently for the transition to a low-carbon global economy,” the report states. “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 and headwinds for high-carbon investments such as oil, gas and coal production.”

Further policy changes recommended by the report address regulatory reforms to electric utility business models, which have been prominent constituents in the portfolios of institutional investors; and consistent policies supporting clean energy investments, instead of tax incentives that, in the US and elsewhere, are dependent upon the changing winds of political action.

According to Bloomber g New Energy Finance, clean energy finance decreased to $254 billion in 2013, 11% lower than the $281 billion recorded in 2012. In 2011, clean energy investment reached a high of $318 billion. While the recent Investor Summit provided cause for cautious optimism, it is past time for decisive action. All the major players in supporting clean energy—investors, banks, and policymakers—will have to make 2014 the turning point for clean energy finance.

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