Why Institutional Investors Are Shifting to Cleantech

For years, investment in cleantech has been seen as risky, which attracted the pioneers and VCs who were willing to invest in earlier stage companies and technologies.

But Risk Measurement and Valuation are Evolving

Today we are witnessing a shift in how traditional asset allocators measure risk and value the underlying investments in their portfolios – specifically with incorporating the potential impact of climate change.

According to industry estimates, the financial impact (i.e. losses through stranded assets: physical damage from flooding, failing crops, financial impairment, insurance claims, resource shortages) could be anywhere between US $2.5-4.2 trillion across multiple asset classes.

The longer-term implications for the future of asset management lie with the impact of climate change on physical assets or natural resources: real estate, timber, infrastructure, agriculture, for example.  Given the longer-term investment horizon for many large-sized asset managers (namely pensions and endowments), efforts to mitigate near-term volatility in real asset pricing can be realized; however, over time, diversification strategies and risk-adjusted asset returns are vulnerable.    

Valuation methodologies are also evolving in response to climate change. As a complement to accounting standards set by FASB and IFRS, the Sustainable Accounting Standards Board (SASB) incorporates an impact-focused methodology by grouping companies into sectors and industries in accordance with a fundamental view of their business model, resource intensity and sustainability impacts, and their sustainability innovation potential. SASB Standards have received support from some of the world’s largest investors who collectively manage ~$26T in assets.

A groundswell of support is building, in 2018, over 400 institutional investors representing over $31T in assets called on governments to take more meaningful steps to tackle climate change, including steps to cut emissions, and phasing out subsidies for fossil fuels. Institutional-level investment decision-making is evolving, thankfully. Our view at Inerjys Ventures is that with changing perspectives and capital support, the cleantech sector will be positioned well for years to come.  

As widespread market adoption of cleantech continues to gather pace, the industry transitions towards sustainable growth. This serves as an attractive entry point for global asset allocators, who can incorporate cleantech and renewables investment strategies. .

“From now on, climate change will factor in each and every investment decision we make across the breadth of our portfolio. In building this strategy, we have undertaken a thorough analysis of markets and institutional investors’ best practices.” stated Michael Sabia, President, and CEO of Caisse de dépot et placement du Quebec.

For investors who are agnostic to typical market cycles and who can deploy their capital through a long-term lens, renewable energy is a key allocation of institutional as well as retail investment. While market adoption of clean technologies can take time, this new energy transformation represents a massive paradigm shift in investment decision-making.