Arctic landscape

Alternative Investors and Managers

  • Mike Hayes, Leadership |

In the end, as it always does, it will come down to money. There are many fundamental things we need to put in place to deal with climate change but ultimately, it is the mobilisation of capital which will be required in trillions of dollars to really make the difference between now and 2030.

However, before capital will mobilise at scale and in geographies where it is most needed, barriers such as ineffective or lack of government policy must be resolved. Then, even with policy changes in place, the fundamental challenge will be to bring the asset management industry to invest right across the range of climate change solutions in areas such as renewables, energy efficiency, electric transportation projects and many other areas.

Taking renewable energy as an example, this has been a significant success in the developed world over the last 15 to 20 years and the success is in no small part down to the fact that the investors and asset managers recognised the value in the asset class. It is one of the most sought after alternative investment classes with return expectations falling continuously as the risks are better understood by investors. I would say that the participation of investors seeking these new forms of investment opportunity has directly led to the tremendous growth in renewables over the past 10 years. However this success has principally been in developed countries and came about principally because the policy environment in these countries facilitated and encouraged investment.

The real challenge now is to find ways to show that sustainable economic returns can be made through investment in renewables and most importantly other climate change solutions in the developing world as this is where the greatest challenge currently lie particularly following the stark messages contained in the recent IPCC report. Also for some of these countries, the relationship between low carbon solutions and other issues such as health, agriculture and overall economic development is all too clear. The reality is that 1.2 billion people worldwide still do not have access to electricity.

Where is the alternative investment industry at on this agenda today?

It is now abundantly clear that climate change risk is now much better understood amongst the institutional investment community than heretofore. For example:

- The concept of responsible investment has now very much taken hold and the message that sustainable investment can deliver economic returns is now well understood.

- The fact that investors are slowly reducing their fossil fuel investments highlights the fact that climate change risk is now fully taken into account as a real risk by investment managers as well it should. The advent of the TCFD initiative seeking financial disclosure of climate related risks for companies is only going to reinforce this trend.

- We have also seen the institutional investment community embrace the concept of green bonds and such issues are now growing exponentially year-on-year and this asset class is becoming increasingly important.

However, while all of the above is most welcome, we now need investment community to make the transformational step and start investing capital where it is most needed in the fight against climate change – renewables and other climate change mitigation projects in the developing world. It is clearly not feasible to ask asset managers to take on additional risk particularly as their own investors would not want them to do so.

Let’s be real about this - unless we find ways of delivering risk adjusted returns to investors, capital will not be mobilised just because it’s the right thing to do or is “sustainable”. This is one of the great challenges of the climate change debate in 2019 and we need to find ways to bridge this gap between the availability of investment capital and the investability of projects where capital is required.

There are no easy solutions to this question but I set out below some thoughts to encourage debate, because I believe ultimately this is going to become the critical question.

1. As a funding technique, the concept of blended finance is totally under-utilised. Blended finance is a very effective mechanism for helping to partially de-risk projects for investors and there is a lot of interest amongst public investors in participating in these structures.

2. The role that insurance companies can play is completely misunderstood in the climate change industry – insurance views risk in a completely different way due to its ability to manage risk through diversification. We have already seen the use of political risk insurance being used in a positive manner and also many global insurance companies are offering other relevant products such as currency protection, partial PPA de-risking etc.

3. Last but by no means least I come back to government policy. If the policies are in place (and critically if there is certainty around their continuance), investors will feel more comfortable – this can be seen in a number of developing countries such as Chile, Mexico and Morocco.

As many of the world’s leading asset managers convene for the Cayman Alternative Investment Summit (CAIS), it would be great to see further discussion around this topic. If we can successfully succeed in making these projects sufficiently investible, it represents an incredible opportunity for the world of alternative investment.