Impact Funds, Climate Change and the Environment

How can investors start to develop strategies which address climate change and biodiversity loss?

By David Gowenlock, Funds Advisory · December 17, 2020

Despite all the other challenges we have faced this year, Climate change remains a central issue investors are keen to address with impact capital. This focus is warranted, on the fifth anniversary of the 2015 Paris climate accord this month UN Chief Antonio Guterres urged all world leaders to declare a state of climate emergency, adding ‘there is no vaccine for the planet’.

It seems impossible to imagine global economies can meet the required decarbonisation slopes required by a 2 degrees pathway which excludes negative emissions technologies (NETs):

Source: Stefan Rahmstorf’s plot “Emission paths for reaching the Paris Agreement

A 1.5 degree pathway is simply impossible without NETs and it’s clear any sensible pathway necessitates substantial institutional capital investment. However these needed NETs are still some way off commercialisation; Direct Air Capture (DAC) is very prohibitively expensive with Climeworks charging £850/tonne for sequestered carbon (current EU EUA pricing is around €30/tonne), and bioenergy with carbon capture and storage (BECCS) presents several challenges at scale. An Imperial College London Briefing Paper recently warned policy makers should be sceptical about a future that is reliant on BECCS technologies.

This video courtesy of Lombard Odier and The FT helps demonstrate how far we have to go before DAC becomes a reality:

The commercial challenges to industrialised NETs mean many investors are exploring nature-based solutions, including agroforestry and restoration projects which are made viable through the production of carbon credits. With the World Bank stating carbon prices need to triple from their current level to meet Paris Agreement, some of these solutions may become much more attractive in the coming years.

These technologies need to scale quickly – the U.K.’s Climate Change Committee has warned that UK GHG emissions must fall by almost 80% in just 15 years in order for the U.K. to stay on track to meet its climate goals.

In the meantime, we expect the investment in renewable energy generation to scale rapidly as energy grids are decarbonised – a notable European renewables investor found institutional LPs expect to increase allocations to renewable energy infrastructure amounting to $742.5bn in the next 10 years alone.

This huge investment opportunity in the coming years to help tackle climate change whilst generating financial returns has not been lost on LPs. As a recent report by Octopus Investments on institutional investor attitudes finds, allocations to renewables infrastructure are expected to almost double from 4.4% to 7.1% over the next five years amounting to $742.5bn of investment in the next 10 years alone.

We explore these areas in more detail in a Sustainable Energy & Renewables webinar featuring Octopus Renewables, Impax AM and ETF Partners.