Twenty-five years ago, most business activity in sustainability was relegated to the “corporate sustainability” desks in the back corner.
At the time, climate finance and market-based solutions were merely concepts. People who cared about climate change thought the solutions would come through a combination of command-and-control regulatory interventions and aggressive philanthropy.
Fast forward to today, and it’s clear that in order to avoid the economic devastation and geopolitical destruction that a significant rise in global temperatures will cause, the world needs a vast increase in total capital invested in clean energy infrastructure each year.
According to BloombergNEF, the world needs to increase investment in clean energy from nearly $2 trillion per year to $7 trillion per year to reach net-zero emissions. The only way that happens is if investors see strong risk-adjusted returns on these investments. While it will not be easy, we think this future is within reach because of what we’ve done already. In fact, clean energy presents one of the most compelling opportunities available across our entire economy.
The private sector, governments, and citizens have all made it a priority to prevent the worst impacts of climate change, and it will take all of these actors to build the markets we need to transition the economy. While some traditional capital markets have yet to step up at the scale necessary, new players have emerged that prove attractive returns are available when capital solutions are designed intentionally.
Corporations and financial markets need to reorganize, reorient, and redirect capital at a speed and pace unseen since the advent of the industrial economy. But while the shift must be swift, the investment strategy must be long-term and flexible, and it must leverage specialized expertise.
From solar and wind power to carbon capture and advanced battery technology, most of the climate solutions we need are available today and ready to be deployed. Customers and communities are already benefiting from the immediate effects of these investments — from electric school buses offering improved air quality and better health outcomes to community solar delivering energy cost savings to microgrids providing greater resilience during extreme weather. Naturally, we all want more of those benefits. And more customers and communities should get them. To mobilize the necessary human and financial capital required to deliver those benefits, we need more creative models that connect these solutions with the demand.
Capital markets have historically been organized by asset class, sector, and geography because these were the divisions that made us think that we could manage the risks across a portfolio. Climate, like the internet in its infancy, is a theme that cuts across all asset classes, sectors, and geographies — it’s both a cross-cutting risk and a cross-cutting opportunity. As a result, to mitigate the real risk from climate change and take advantage of the opportunities that come from building a climate-smart world, we investors must organize ourselves according to the challenge that this moment presents.
Opportunities for capital markets to address climate change have and will come at us in all shapes and sizes. For example, we have made investments in sustainable power generation, carbon free mobility, and waste facilities across North America. What we have found is that it is important for investors to have the flexibility to look across asset classes and across the capital structure to make these deals work.
Our organizations oversee and invest tens of billions of dollars per year, giving us a front row seat to observe the value and the impact of investments in the clean energy economy. As we see the success, we see more of our peers in the pension fund and private capital community interested in participating in that success. That increased investment leads to a virtuous cycle: more investment enables greater scale, greater scale enables cheaper prices, and cheaper prices enable larger markets where more participants can profit. A decade ago, we hoped and even forecasted that this would be true; our experience over the last ten years has proven it to be true.
California’s public-school educators are relying on CalSTRS to sustain long-term positive investment returns. Our goal to achieve net zero portfolio emissions by 2050 or sooner is grounded in our mission to provide a secure retirement for our members. The investment team at CalSTRS has been organized with cross-functional flexibility. This enables us to pursue relative value and the best returns for the total fund across the full spectrum of climate investment opportunities. These opportunities will help us achieve our mission and our net zero goal.
At Generate, we built a diverse team of investors and operators who understand both the capital needs of the transition and what it will take operationally for projects to be successful. What was common in our experience was the constant reminder that the transition to a sustainable economy requires us to be flexible and long-term oriented.
Delivering successful returns only happens when you are appropriately focused, with teams of experts who can do the challenging work to develop, build, finance, manage, and operate the projects that are the foundation for an economic and societal backbone that is both climate-smart and sustainable.
We’re at an inflection point in our infrastructure transition. There are great success stories if you know where to look. The last 10 years have validated our original thesis that a bespoke design of financial capital and human capital can accelerate the adoption of critical climate solutions while delivering market-leading or market-beating financial results. The next 10 years require that we learn from, build off, and massively scale up these dedicated pools of money and talent to meet our collective goals. Our investors and community are counting on us. Proof, not promises, will determine our pace.
Scott Jacobs is CEO and co-founder of Generate Capital, and Scott Chan is chief investment officer of CalSTRS
