The transition to a low-carbon economy is creating new markets for clean energy, sustainable agriculture, and other eco-friendly technologies. What are the factors driving growing interest in climate investing and how can investors make an impact while reaping the financial rewards?
With increasing demand for electric vehicle charging stations, solar panels, and meat alternatives, consumer behaviour suggests that the reinvention of our energy and food systems is already well underway. But shifting consumer behaviour is just one of the many factors driving a genuine revolution in how our economy works.
“The lower cost of renewable energy production is another huge factor,” explains Executive Director Samantha Avizou-Durante, who is one of Julius Baer’s Sustainability Ambassadors. “Nowadays it’s roughly at par, if not even cheaper than oil and gas, so there’s no reason to pay a premium to produce renewable energy.”
Government incentives and regulation are creating tailwinds for climate investing
On top of this, government incentives and regulation are creating tailwinds for climate investing. The focus in the US tends to lie on incentives for cleantech infrastructure and new climate technologies. On the other side of the Atlantic, Europe’s approach is more about introducing regulations. Under the Carbon Border Adjustment Mechanism, for instance, EU-based companies will need to abide by the same carbon emissions standards for production sites located outside of Europe that would apply in the EU. These regulations aren’t always popular, but they also mean that financial institutions and private market funds need to provide more transparent reporting when it comes to environmental impact.
“When it comes to Monaco, the Climate and Energy Plan of the Principality includes technical, regulatory, financial and awareness-raising campaigns. The objective of this programme is to combat climate change and adapt the territory to these changes, with an approach based on sustainable development. Monaco is also addressing global warming through its commitment to reduce its greenhouse gas emissions by 80% by 2050, with an interim target of cutting emissions by 50% by 2030 compared to 1990,” explains Samantha.
Developing new technologies along the value chain
These tailwinds have not only led to greater investments in renewable energy production but have also helped to create an entire ecosystem around climate investing, particularly in the United States and Europe. However, research and development behind new climate technologies is not focused solely on renewable energy sources. For the green transition to succeed, more investments are needed in technologies that can transform our existing infrastructure. For instance, in many countries, power grids must be drastically modernised to cope with growing renewable energy generation. This can be achieved through software that manages decentralised electricity systems and helps to balance demand and supply.
Using technology to protect nature
The world’s growing population and the risk of a decline in available agricultural land due to climate change means that new ways to produce food are needed to feed the planet. Vertical farming, newer generations of fertilisers, and automated precision harvesting technologies will play a key role in the transition to making food production more sustainable.
Helping innovative companies grow through private market investments
Over USD 82bn were raised from private markets for climate solutions in 2022, representing approximately a third of all venture capital investments made that year. Private market investing is a key driving force behind the rise of these new technologies, providing early-stage and growth financing not otherwise available from public markets. Through private markets, one can invest directly in earlier-stage companies that haven’t yet seen an initial public offering. In this way, investors are helping innovative companies grow by giving them capital that isn’t available from banks.
The involvement goes beyond providing financing. Investors in private equity funds also enable companies to have access to expertise and network know-how from specialist fund managers, who usually work closely with the companies for a period of approximately five to eight years. This gives investors more control over the company than they would get through the public markets.
Diversifying portfolio in terms of return and impact
As with any investment strategy, diversification is an important factor in optimising returns. Climate investing is a broad category so investors should be exposed to a wide range of different technologies because some will grow more than others. Early-stage companies might come with higher risk, but they could also offer greater potential.
It’s also important to diversify a portfolio in terms of impact. The selection process should consider both commercial and impact aspects. If an investor only invests in a certain type of battery technology, for example, they are restricting themselves to a very narrow field. Other technologies might emerge that replace that battery type and render it obsolete.
This places particular importance on fund selection. There are many fund managers who claim to do climate investing, so it’s crucial that an investor can rely on a team that scopes the market, does proper due diligence, and differentiates the promising investments from the less promising – both in terms of returns and impact.
The road ahead – creating lasting change
As a growing range of investors focuses on climate solutions and the number of funds being launched increases each month, it seems inevitable that the universe of climate technology companies will continue to expand in the coming years. The current rise in climate investing is multifaceted. Many new technologies are already working seamlessly. Like climate change itself, climate investing is not just a theoretical concept, but something we are already experiencing.
Source: Monaco for Finance