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Return on climate investment is key to broad deployment of innovation, experts say

Oct 22, 2020
Precourt Institute

By Kate Gibson

The most important thing that climate investors can do is make money. Demonstrating that sustainable investing pays off is key to attracting more investment, according to two impact investment experts during Stanford University’s recent Global Energy Dialogues.

To address climate change, the world needs to invest a lot more money to build out new sustainable energy technologies, according to Eric Toone, executive managing director of Breakthrough Energy Ventures, and Avik Dey, managing director and head of energy & resources at the Canadian Pension Plan’s CPP Investments. Their Oct. 14 discussion on broadly deploying sustainable energy inventions also covered the investment ecosystem and energy access in the developing world. 

“Investors invest to make money. Full stop,” said Toone. We need to show “the world that there is a way to invest in this space and make money.”

The size of energy

A key challenge for those working to invest in clean energy is trying to wrap your head around the size of the world’s energy needs, according to Toone.  “We do energy at scales that dwarf any other human activity,” he said.

Breakthrough Energy Ventures currently has a billion dollars invested in cleantech investment and will soon start a second $1.5 billion fund. By some measures, that’s a lot of money, but “compared to the magnitude of the challenge in front of us, it’s not even a drop in the bucket,” Toone said.

Oil companies have experience deploying technologies at these incomprehensible scales. Dey and Toone agreed that these companies could play a role in the energy transition, but disagreed on their capacity for change.

"Not very many businesses have been able to steer their ships and make transitions to fundamentally reinvent themselves,” said Toone.

Taking “the other side of the bet,” Dey noted that Exxon Mobil is well-positioned to understand and innovate in carbon capture and sequestration and Shell is poised to be the world’s largest power producer in 10 or 20 years.

“One of the things I'm most excited about across any asset class is what the energy transition is going to mean” for power generation, Dey said. “What was big oil is now going to be 'big e’ electricity.”

The investment ecosystem

Clean energy projects need investment at all stages of development, Dey and Toone agreed. Breakthrough Energy Ventures both nurtures nascent technologies and helps bring already successful ones to wider deployment. The Canadian Pension Plan Investment Board has historically invested in traditional energy but has recently taken the opportunity to invest in early-stage venture funds and proven cleantech innovations.   

“To be a successful, long term investor, we've got to be in that (investment) ecosystem. We've got to be an active participant,” said Dey.

Dey and Toone were interviewed by Arun Majumdar, director of Stanford’s Precourt Institute for Energy and professor of mechanical engineering, Alicia Seiger, managing director of Stanford’s Sustainable Finance Initiative, and Mayank Girdhar, Sloan Fellow at the Stanford Graduate School of Business.

Asked by Seiger about the financial instruments being used in clean energy investment, Dey answered that he sees active participation from all market segments. For example, the green bond market now has close to one-thousand issuers from around the world. In equity markets, at least a couple of dozen impact funds are investing around clean energy and climate action. Private equity investors with a focus on sustainability issues are flooding the market.  Dey sees climate reporting and carbon pricing as crucial to green investing.

“You can't change what you don't measure,” said Dey, “We have to have a level playing field in terms of how we report emissions” so that we can ultimately price and put a value towards them.

Majumdar asked Toone about addressing emissions in agriculture and food production, a focus for Breakthrough. Because a significant portion of greenhouse gas emissions come from ruminants like cows, BEV invests in several companies working to develop effective meat and dairy substitutes. These include Motif FoodWorks, Nature’s Fynd, Alpine Road and Biomilq. In an effort to mitigate deforestation, Breakthrough has also invested companies working to produce synthetic alternatives to palm oil.

“As we calibrate into this new world, there are going to be countless opportunities to put capital to work and make money,” said Dey. 

Energy in emerging economies

Ninety-seven percent of increased energy demand over the next 30 years will come from India, China and Africa, according to Dey. Cooperation from India and China is critical to moving past coal to meet the world’s energy needs, and electrification in Africa will be a “mission-critical opportunity set” for investors and governments. Dey sees opportunity in distributed generation and integrated energy management solutions but notes that cost will be a key factor.

“If we can't get the technology to bring the cost down, it's going to be hard to drive policymakers in a different direction,” he said.

It’s important for the world to both address climate change and energy access issues, according to Toone

“There's an incredible onus on us to develop technologies that give that huge chunk of the world Western-like standards of living without the environmental problems,” said Toone. “That is our burden, that’s our responsibility, that’s what I take most seriously.”

In the next Global Energy Dialogues session on Oct. 28, Microsoft's chief environmental officer, Lucas Joppa, will explore how industry can go beyond social advocacy in advancing core commitments around sustainability.  All sessions are online, free and open to the public, with registration required at gef.stanford.edu.

The Global Energy Dialogues are funded by the Stanford Global Energy Forum.