Trillions line up to support a switch to energy transition globally as environmental investing expands beyond a niche market
Where Money Flows, Energy Investment Grow
In the last six months, there has been a significant increase in environmental investing as large companies and wealthy investors direct their capital away from fossil fuels to fund green, clean energy solutions. With $2 trillion assets focused on the environment in Q1 of 2021, roughly three times the investment of the last three years combined, ESG investing is expected to grow significantly. In fact, more than $5 billion in bonds and loans are issued daily now, according to The Wall Street Journal. J.P. Morgan Chase and Bank of America, the two largest banks in the United States, have pledged $4 trillion towards climate change for the next ten years.
Change has been brewing for a while. Mark Carney, the governor of Bank of England, pointed out in June 2017 that more investors are seeing data about climate change in financial disclosures by private enterprises. The Bank of England conducted a survey of top 2000 companies and discovered that the vast majority disclosed some climate risks. While a bank’s balance sheet lasts roughly five to seven years, on average, the composition of assets can be expected to shift as investors seek out environmental investments that earn returns.
“A business that understands climate change risks and opportunities will succeed in the low carbon economy. Climate change reporting and disclosure is the best way to do this because it aligns businesses to emerging market trends, embeds sustainability within a corporate culture and enhances access to capital.”
Carney is now the Vice Chair in charge of environmental investing at Brookfield Asset Management and building out a $5.7 billion fund focused on climate investments. Interest in clean energy funds have gone up and down over the years, but as electric vehicles become more mainstream driven by Tesla and now increasingly adopted by mainstream automotive companies with associated banks and investors lining up, interest in environmental investing is steadily increasing. Financial asset managers are seeing opportunities for large profits in the clean energy sector. Interest in green bonds and clean energy sources has increased in large investment firms as well as younger investors, both united in their interest in mitigating climate change disasters. The government under President Biden has also shown interest in spending significant dollars to address climate change. All these factors combined lead to a sharp uptick in interest in environmental investing.
Graph and data provided by The Wall Street Journal
While money has been pouring into environmental investment funds, companies like Dominion Energy Inc., one of the largest utility companies in the U.S., are heavily investing in clean energy sources such as wind and solar, spending as much as $26 billion over the next few years. The state of Virginia passed its own clean energy act in 2020 with the requirement that Dominion be carbon free by 2045. Given its large customer base that purchase electricity, Dominion was able to quickly finance the project and now has set up several offshore wind facilities off the coast of Virginia Beach, VA. This project is in development and will become the largest offshore wind farm in the U.S., offering 80 turbines that can power 660,000 homes.
Dominion Energy Inc. offshore wind turbine
As more capital flows into clean energy, innovation in much needed areas also will increase by default such as better efficiency in solar cells, increasing recycling options and ensuring that materials in the supply chain support carbon reduction.
Tech giants and pioneers Apple and Microsoft have both made significant investments to reduce their environmental impact, using 100 percent renewable energy sources for their offices, workspaces, retail spaces and factories worldwide. Microsoft has laid out a vision for a “carbon negative” future where it actually generates clean energy to support other organizations and has a zero carbon footprint. Apple is now 100 percent powered by renewable energy and is now systematically reinventing its internal processes for its supply chain such as aluminum manufacturing to also be environmentally friendly.
“This is where the world is going. It’s where regulators are going. It’s where customers and investors are going.”
Reducing Fossil Fuel Consumption and Dependence on the Middle East and Russia for Oil and Gas
Investments in clean energy funds along with greater adoption of clean energy by consumers and companies will also have a secondary positive effect in reducing fossil fuel consumption and associated trade wars tied to oil and gas in the Middle East and Russia. It was only a few years ago in 2014 that energy companies in the world spent as much as $735 billion to extract oil and gas. In 2020, that number dropped to less than 50 percent while purchase of wind and solar power surged to $220 billion, according to data pulled by Rystad Energy, a consulting firm from Norway.
While these numbers are significant, there still needs to be much higher investment levels to mitigate climate change disasters. Wood MacKenzie, a global energy, chemicals, renewables, metals and mining research and consultancy, estimates that $50 trillion in investment is necessary to meet the greenhouse goals stated in the Paris climate accord (keeping the rise in global temperature to a maximum of 1.5° Celsius above preindustrial levels) and to reduce fossil fuel and greenhouse gas emissions, getting to net zero in 30 years. Half of those funds would need to be spent on wind power, solar power and battery storage. About $18 trillion would be required to modernize the electric grid. Without these investments and changes underway, weather-related catastrophes are expected to increase.
Graph and data provided by The Wall Street Journal
In 2020, investment in renewable energy projects, electric vehicles and green projects was over $520 billion, according to Bloomberg New Energy Finance that tracks green investments. Fossil fuel investing has become costlier and riskier where even credit rating firms such as Moody’s and Standard & Poor’s issued out warnings that industries that produce large amounts of carbon could suffer financially.
Data from Morningstar reveals that more than 70 percent of funds based on environmental, social and corporate-governance practices across all asset classes beat returns of funds without those objectives in the first four months of 2021.
In April of this year, Bridgewater Associates, the world’s largest hedge fund, launched a sustainable-investing venture to meet client demand.
Companies and Governments Invest More in Green Energy
According to the Institute of International Finance, companies and governments issued nearly $315 billion in green and sustainable bonds and other debt securities in Q1 of this year.
Banks, typically linked to fossil fuel initiatives, are actually now fighting over funding wind and solar projects, according to Jigar Shah, the new head of the Department of Energy’s federal loan program that offers financing for clean energy projects. Last month, J.P. Morgan Chase pledged to spend $2.5 trillion to support environmental investment including wind and solar projects and clean energy firms in need of capital while Bank of America pledged $1.5 trillion to use towards green initiatives over the next decade.
The loan office has had its own share of successes and failures with the failure of the Solyandra, a solar energy firm in California and its success with Tesla, that it loaned $465 million in 2010 to build a factory in California and speed up production of its model S vehicle. Back then, Tesla was considered a risky venture. Today Tesla is one of the most profitable entities in the S&P 500 and its popular stock has led to a surge in investment in electric cars around the world and related industries. The company paid back its loan early in 2013 and now has a market valuation of $560 billion.
Other possible federal government supported initiatives include the Clean Energy and Sustainability Accelerator Act that will provide $100 billion in funding for projects in renewable power, grid infrastructure, reforestation, and subsidies through tax credits proposed in the new infrastructure plan under President Biden.
Reducing Carbon Consumption
In addition to clean energy initiatives, reducing carbon consumption is important. The EU made major strides by limiting single-use plastic consumer goods to prevent plastic from ending up in the ocean and waterways. Investing in forests can help in reducing carbon as forests store carbon, taking it out of the atmosphere.
