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Four climate investors explain the new boom — where the money’s going and risks ahead

When it comes to the climate industry, where exactly is the money going?

According to CNBC:

Clean energy is attracting billions of dollars in investments, but as the pace and scope of the transition to a greener economy accelerates, experts say the trend is just getting started.

“I think we’re early days,” Eli Aheto, managing director at BeyondNetZero, said recently at CERAWeek. “There is still a good amount of room to add more and more capital into this theme,” he added, noting that the “theme” itself is broad and encompasses a host of different technologies across industries.

Aheto, alongside three others with climate investing expertise, came together for a panel called Financial Innovation’s Growing Role in Climate & Cleantech. The panel was one among many focused on the renewable energy side of the equation at a conference in Houston that was once focused squarely on oil and gas.

Clean tech funding back with a ‘vengeance’

In 2021, global venture capital funding for clean tech hit $43 billion, more than double 2020′s $20 billion, according to data from PitchBook. A separate study from PwC found that when other forms of financing including private equity are included, $60 billion was raised during the first half of 2021 across more than 600 deals.

Brad Fierstein, a partner in the infrastructure group at Apollo, said funding for the space has returned with a “vengeance.”

Interest in clean tech began to accelerate in the mid-2000s when oil and natural gas prices were rising and money was cheap. But then the financial crisis hit. Ultimately, more than half of the $25 billion in venture capital funding that went to clean tech between 2006 and 2011 was lost, which led to investors shying away from the space.

But even now, Fierstein said the amount of money chasing the space is “a drop in the bucket in terms of the scale of the opportunity.” This is both when it comes to the necessity to accelerate clean technologies, as well as the large opportunity set across investments.

Attracting new investors

Unlike what happened during climate investing 1.0 — as some call it — this time around the panelists said there’s more of an ecosystem in place. There’s a clearer line of sight for where dollars are going and the types of projects that are being deployed.

Part of this is thanks to the surge in ESG investing, which is attracting record amounts of capital and bringing shareholder activism to the fore. The impacts of climate change are also much more visible than they were a decade ago. 

As Philip Deutch, managing partner at NGP Energy Technology Partners, noted, there are more types of investors looking at the space than ever before, including universities, private equity, venture capital, and major corporations looking to capitalize on the energy transition. 

But not all capital is seeking the same opportunities.

Farnam Bidgoli, head of ESG Solutions at HSBC, said that investors are looking for different things. From her standpoint of working at a major bank, she’s seen a lot of appetite among larger players — including institutional investors — for the relatively more mature sectors such as solar, wind, and electric vehicles.

This sometimes comes at the expense of technologies that are at an earlier stage, or technologies that don’t have an immediately obvious role in the energy transition. But climate investing goes well beyond renewable energy, and there are applications across every part of the economy. Software that makes buildings more efficient, for example, or vertical farming that reduces emissions associated with food shipment.

“Enabling or facilitating technologies where the story is a little bit more complicated — we don’t see the kind of investor appetite,” she said.

At BeyondNetZero, which is a climate venture from General Atlantic, Aheto invests in high-growth companies. He specifically looks for companies that are not betting on new technologies, but are relying on existing and proven technology. Companies need to have a “real business model today that they can demonstrate by revenue and gross margin.”

One area that Apollo’s Fierstein is focused on is offshore wind. He noted that while the industry is mature in the European market, it’s still getting started in the US.

“It’s a huge undertaking,” he said of the capital required to get these projects off the ground. In addition to the turbines themselves, there’s also the port infrastructure, specialized ships and transmission infrastructure, among other things.

Offshore wind is a focus for the Biden administration. The White House has committed to deploying 30 gigawatts of offshore wind energy by 2030, which is enough to power 10 million homes. In February the government raised a record $4.37 billion by selling six wind leases off the coasts of New York and New Jersey, in the first-of-its kind auction under President Joe Biden.

“We’ve really seen a shift not only in the investor demand, but also the opportunity set,” said Fierstein. “There is more opportunity to invest now in energy transition and climate change mitigation.”

Critics of ESG investing point to a lack of transparency around how ESG metrics are being evaluated, not least because “ESG” means a lot of different things to a lot of different people. And in an era where many companies feel they must speak out on environmental and social issues, it can be hard to differentiate between fact and faction.

At the end of the day, Deutch said, all of the labels are a “really big waste of time” and separating the energy transition and energy security will lead to bad results. “We’re all part of the same bathtub … we should spend a little less time trying to figure out what’s the most virtuous path because you need them all.”

HSBC’s Bidgoli echoed this point, adding that an exclusionary approach — when oil and gas companies are entirely cut from a portfolio — is not always the best path forward. She believes the oil and gas sector needs to participate in decarbonization, given that hydrocarbons are forecast to be around for years to come. She added that many of the so-called “quick wins” over the course of the next decade will come from opportunities in the oil and gas sector — around cutting methane emissions, for example, which are 25 times more potent than carbon dioxide at trapping heat in the atmosphere, according to the EPA.

Stretched valuations

But while the panelists all pointed to huge opportunities, they also highlighted some risks. Deutch noted stretched valuations thanks to too much capital chasing too few opportunities. 

Aheto also pointed to valuation concerns, and added that supply chain is another headwind for the group. He said that each of BeyondNetZero’s portfolio companies is currently facing a supply chain challenge. Deutch added that supply chain bottlenecks are far worse for early stage companies given limited revenue and cash flow.

Policy uncertainty is another headwind given how long some of these projects take to reach completion. 

“What investors need is stability and predictable politics. If you want private capital to come into something and support it, don’t change the rules on them,” said Fierstein.

“I can’t put dollars behind any part of the U.S. political process. It’s unstable,” added Deutch.

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