Sunshine industry: A floating solar power plant in China © Imaginechina/REX/Shutterstock
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More than $2.3tn of annual investment in the energy sector is needed to meet the “sustainable development” conditions that will help avoid catastrophic climate change, according to the International Energy Agency.

That annual commitment must rise again to an average of more than $3.2tn between 2025 and 2040, with much of it skewed towards renewable power sources and improved efficiency, to achieve the best-case scenario set out in the IEA’s latest Energy Outlook report.

Commenting on the report this month, Fatih Birol, IEA executive director, said: “Seventy per cent of global energy investments will be government-driven and, as such, the message is clear — the world’s energy destiny lies with government decisions.”

However, within this sphere of spending, much of the investment will be private money attracted by full or partial revenue guarantees from governments. Meanwhile, just over a quarter of total energy investment in the coming decades is still expected to come from private enterprises, responding to prices set in competitive markets.

Last year’s $1.8tn of global energy spending — both public and private — undershot the IEA’s yearly spending target to guarantee energy supplies and meet climate change ambitions.

Graphic for future of energy report
Graphic for future of energy report

However, many private investors have already spotted an opportunity to earn rewards by plugging these gaps via direct investment in green energy projects and related financial instruments.

“You have a huge amount of investors now who care about climate change, not because they think they want to make the world a better place but [because] they see it as a risk,” says Maximilian Horster, head of ISS-Climate, a consultancy that helps investors understand the impact of climate change on their investments. “Investors ask themselves: ‘What are the physical effects of climate change for my portfolio?’”

In the UK alone, more than 120 green energy projects have been financed through crowdfunding, according to a report published last year by trade body TheCityUK and the Centre for Climate Finance and Investment at Imperial College Business School. Among institutional investors, global green bond issuance grew from $3bn in 2011 to $95bn annually in 2016, according to the study.

Green bonds, which are used to finance renewable power and other environmentally friendly projects, have been particularly popular with large global institutional investors. The California State Teachers’ Retirement System, one of the largest pension funds in the US, has allocated $300m to the asset class. It also invests millions of dollars in clean energy, infrastructure and low-carbon indices.

Vikram Widge, global head of climate finance and policy at the International Finance Corporation (the World Bank’s private sector arm) says investors such as Calstrs like investing in green bonds because it is similar to investing in fixed-income assets. “The investors like it. It’s simple,” he says. “It builds on what they understand.”

IFC has itself directly invested billions of dollars in green bonds, he adds — though he also notes that the asset class has failed to take off in emerging markets, limiting its power to expand green financing. “I think that’s the biggest challenge facing the green bond market right now,” Mr Widge says. “We are trying to get our clients, especially financial institutions in emerging markets, to build out this asset class.”

To help green bonds gain mass appeal, investors, including the World Bank and asset manager Amundi, launched the Global Green Bond Partnership this year to encourage green bond issuance.

Variations of green bonds are also emerging. The Seychelles, an archipelago of islands in the Indian Ocean, recently raised $15m in the first “blue bond”. It will use the funds to support its fisheries sector, on which it depends heavily for food and jobs.

Earlier this year, Swiss private equity firm Partners Group launched its first $1bn social impact fund, which aims — among other goals — to invest in clean energy. It was created with the backing of investors, including the Canada Pension Plan Investment Board and the state of Texas pension fund.

The fund will hold stakes in companies for four to seven years and target internal rates of return of up to 12 per cent. This target reflects the dual ambition of these investment vehicles — to help meet an environmental objective while turning a healthy profit.

Separately, US buyout firm TPG is raising $3bn for its second Rise fund, which focuses partly on investments aimed at making positive environmental impacts. Investments in its current $2bn fund include Wilderness Holdings, which protects millions of acres of African wilderness, and Fourth Partner Energy, a provider of solar energy in India.

Others, such as US buyout firm Carlyle, are also looking to target companies that will somehow benefit from tackling climate change. David Rubenstein, Carlyle’s co-founder, says: “More and more money is going to go to things that deal with global warming.”

Runa Alam, a veteran investor in Africa and chief executive at private equity group Development Partners International, says: “The impact of putting money into a solar project is huge. Any money that comes in for Africa and climate change makes an impact all over the world because we breathe the same air.”

Making a difference as well as turning a profit is a common goal among investors, she argues.

Personal as well as professional concern in avoiding environmental disaster plays its part in attitudes, she adds. “Every investor that I talk to cares about climate change.”

Still, those seeking funds for green energy projects need to be mindful that their schemes will not always meet the requirements of all investors, particularly those looking for opportunities to scale, says Johanna Köb, head of responsible investment at Zurich Insurance Group.

“We need to look at size to deploy our capital effectively. We won’t be able to look at small [investments],” she says. “We’re not allowed to do venture capital because it’s too risky, it’s too small and it’s too early stage.”

Brian Rice, a portfolio manager at Calstrs, says he is open to expanding the types of projects to which he is willing to commit. “We stand prepared to talk and listen, and to take advantage of opportunities when we can,” he says.

Governments and other public agencies have a crucial role to play in overcoming the barriers needed to unlock the scale of private finance needed to fight climate change, says IEA’s Mr Birol.

“Crafting the right policies and proper incentives will be critical to meeting our common goals of securing energy supplies, reducing carbon emissions [and] improving air quality in urban centres,” he says.

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Copyright The Financial Times Limited 2018. All rights reserved.
About this Special Report

Signatories of the Paris climate agreement meet next week at annual UN climate talks in Katowice, Poland. FT writers look at the latest progress in assessing the dangers of global warming and strategies designed to tackle its economic and human impact

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