Climate Investing: Transition to a Low-Carbon World

By Justin Gerdes | Fall 2015

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Could business — long considered a villain when it comes to the environment — provide the solution to climate change? Experts from a diverse array of backgrounds weigh in as part of Mendoza’s Climate Investing Conference.

Climate change is the most insidious of global challenges. Fossil fuels are the source of most planet-warming pollution. Yet coal, oil and natural gas are embedded in the machinery of every economy on Earth.

In June, Pope Frances focused on the issue of climate change in his encyclical, “Laudato Si’,” or “Praise Be to You,” placing blame for the current level of destruction and degradation primarily on the use of fossil fuels and human activity. Arresting the growth in carbon emissions and transitioning economies in countries rich and poor in the coming decades, however, is likely to require trillions of dollars.

These challenges and more were on the agenda at “Climate Investing: Transition to a Low-Carbon World,” an interdisciplinary conference organized by the Mendoza College of Business. Two hundred business executives, investors, scientists, activists and students registered to attend the two-day event, which convened at the McKenna Hall conference center on September 29 and 30.

Ahead of the Climate Investing Conference, Leo Burke (ND ’70), conference organizer and director of the Global Commons Initiative at Mendoza College of Business, said the goals of the conference were simple: to develop a comprehensive understanding of the relevant issues; to determine effective actions that institutional and individual investors can take; and to identify new investing opportunities that can positively impact the climate and the planet.

Impetus for the event came in part from Burke’s conviction that impact investing — investments made to generate both financial return and positive environmental impact — is ready to tackle climate change. But, because the challenge is so daunting, new investment vehicles and business models, as well as diverse perspectives, will be required.

“Not any single individual you could talk to has a handle on this whole enchilada, understands the economic, the scientific, the political, the cultural and the moral issues. People are all touching pieces of the elephant. We want to see, by having enough different voices in the room, if we can really develop a more comprehensive understanding of the issues,” he explained.

Additional inspiration for the conference came from Burke’s longtime work to raise awareness of the need to foster responsible stewardship of the global commons, resources such as the atmosphere, water and biodiversity shared by all and owned by no one individually. “The total inheritance of humankind upon which life depends,” as he put it. In undergraduate and Executive MBA courses at Notre Dame, Burke asks his students to consider this question: “Is there a possibility for human civilization to recalibrate itself to conform to a set of values that includes the welfare of all its inhabitants?”

“There are some real constraints,” he said. “Around 85 percent of global energy comes from fossil fuels; nobody in this transition that I’ve met to date is willing to have the lights go out. Everybody wants to maintain their current energy standard — having access to electricity or access to petrol for transportation, being able to take airplane trips.”

This pressure to meet rising energy demand is compounded by a growing global population. “Between now and 2050, we’re going to add at least 2 billion people to the planet. Those people are going to need energy as well. How do we do this in a way that is equitable? Is just? Is technologically possible? And doesn’t damage the planet any more than we need to?” asked Burke.

The Notre Dame conference fell at an opportune time for participants to reflect on and prepare for an end-of-year calendar dotted with important climate change milestones. For the world’s 1.2 billion Catholics, Pope Francis’ encyclical letter on the environment initiated a conversation that continued with the pontiff’s first visit to the United States.

The week before the conference, Pope Francis urged governments to take action on climate change at two high-profile stops. On September 24, the pope addressed a joint session of Congress at the U.S. Capitol; the next day, he spoke before the UN General Assembly in New York City, just ahead of the official opening of the UN summit for adoption of the post-2015 sustainable development agenda. The next month, Turkey hosted the G20 Leaders’ Summit in Antalya on November 15 and 16, with “Buttressing Sustainability” listed as one of three priorities for the Turkish presidency. Two weeks later, on November 30, representatives from nearly 200 nations were slated to gather in Paris at the UN Climate Change Conference to negotiate the terms of a global climate change agreement.

One looking for hope in the face of increasingly dire and urgent warnings from scientists about the rate of sea-level rise, the stability of the polar ice sheets or
the health of coral reefs, can find succor in the increasingly bullish prospects for technologies the world will need to put economies on a more sustainable footing.

In the wake of the Great Recession, a growing cohort of countries, led by Germany, China and the United States, invested tens of billions of dollars in low-carbon technologies. The U.S. stimulus alone dedicated $90 billion to clean energy. As governments ramped up investment in clean energy, scientists and engineers made steady progress in boosting the efficiency and reducing the cost of renewable energy technology such as solar photovoltaic panels and wind turbines.

Those investments have paid off. Solar PV module prices have declined by 75 percent since 2009 and continue to fall. Wind turbine prices have fallen by 20 percent to 40 percent from their 2008 highs. As the cost of clean energy equipment plummeted, installations and renewable electricity production soared. Generation from utility-scale solar power plants in the United States is 31 times higher today than a decade ago. In the first half of 2015, renewable energy accounted for a record 32 percent of Germany’s electricity production and wind turbines alone supplied 43 percent of Denmark’s electricity.

With more clean energy technologies becoming more competitive in more markets every day — Deutsche Bank estimates that solar power will reach grid parity in up to 80 percent of global markets by the end of 2017 — investors and financiers have jumped into the space.

During the past five years, investors and energy industry veterans have devised a dizzying and ever-growing array of innovative tools and instruments to finance clean energy projects. Third-party ownership of solar installations enables homeowners to add rooftop solar with no money down; power purchase agreements (PPAs) allow government agencies and school districts to install solar arrays with no upfront cost; energy savings performance contracts permit local and state governments to retrofit energy-leaking buildings without tapping taxpayer funds by using energy savings to pay for upgrades; property assessed clean energy financing enables building owners to install energy-saving equipment at no upfront cost and repay for improvements via property tax bills; and public companies called yieldcos bundle renewable energy project assets in order to generate predictable cash flows for investors.

Participants at the Climate Investing Conference learned about still more solutions. In an interview, John Fullerton, founder and president of Capital Institute, a nonpartisan, transdisciplinary collaborative launched in 2010, and conference panelist (see sidebar), talked about ways to combat the endemic short-termism of public companies. One tool his firm advocates for is a cash flow-sharing partnership called Evergreen Direct Investing (EDI). Similar to a yieldco, real estate investment trust (REIT), or master limited partnership (MLP), an EDI focuses on delivering earnings via long-term, resilient cash flows. “If you think about investing that way,” says Fullerton, “it opens up a whole new realm of opportunities for investors to partner with businesses to engineer the massive business model transformation we need.”

All of these tools enable investors to profit by devoting money to clean energy projects a carbon-constrained world needs; at the same time, climate activists are leading an increasingly visible and effective campaign to persuade investors to divest from the planet-warming fossil fuels a carbon-constrained world must reject. And the movement just notched its most impressive victories thus far. On September 2, the California Assembly voted to send a bill to Governor Jerry Brown that would compel the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), the nation’s largest pension funds, to divest their coal assets.

For Fullerton, such steps, though welcome, are just the beginning. The value of the divestment movement, he said, “is to put [climate change] in a moral context. But it’s really the opening salvo. Shifting the energy system is not about buying and selling stocks; it’s about investing tens of trillions of dollars in a new energy system.”