Exclusive interview: Clean energy is the smart play for investors, says Ceres VP
As vice president of climate and clean energy programs at Ceres, Susan Reid oversees the sustainable-investment coalition’s Clean Trillion initiative, which aims to boost global clean-energy investment by $1 trillion a year. Speaking with Entelligent, Reid says investors are doing their part, but that much more capital — especially from institutional investors — will be needed to keep global climate change within safe limits.
You’re seeking $1 trillion a year in additional clean-energy investment. Are investors rising to that challenge?
They're starting to pick up to the scale and immediacy of the opportunity. There's increasing understanding that the clean energy transition is real, irreversible and inevitable at this point, and that it's where the opportunity lies. It's the opposite of the situation we're seeing with the coal sector, which has entered terminal structural decline. Clean energy is the flip side of that equation, and it's where the greatest upside exists.
The latest figures from Bloomberg New Energy Finance show that we've increased global clean energy investment from the baseline in the Clean Trillion report, which was $225 billion a year, to $329 billion a year. But we still need to double that $329 billion by the end of 2020.
Still, we’re making headway?
Yes. There’s no question that clean energy investment needs to be scaled up dramatically, and that's not going to happen without some policy interventions. But in January, we worked with BNEF to look at the gap between their business-as-usual projections for the power-generation sector, and the kind of investment needed to limit global climate change to 2 degrees Celsius. The conclusion back in January was that it was roughly a $5.2 trillion gap, in terms of the global investment needed between now and 2040.
Given changes we've seen this year — from China and their coal moratorium, to slowdowns in the build out of high-carbon resources, to the dramatic renewable-energy cost declines — that gap has already shrunk materially to something closer to $2.6 trillion. Again, that’s only in the electric power sector. But the good news is the gap is shrinking.
What trends are helping to close that gap?
The Paris climate deal is a part of it — it sent a powerful market signal in terms of the world's commitment to clean energy transition, although its implementation will depend on a number of factors, including the adoption and implementation of rules and laws and incentives.
All of this is supported by two big mega-trends. One is the cost decline for leading clean energy technologies, particularly wind and solar, which has changed the competitive equation for clean-energy resources. And the other is that many companies — for a host of reasons, including a strong interest in having a hedge against the volatility of fossil fuel prices — are stepping up to secure their own clean energy.
That's a real paradigm shift from where we were before: these companies are dispelling the false notion that ambitious clean-energy and climate policies are somehow at odds with economic and business imperatives. There’s a virtuous cycle: there’s actual investment and action, which not only buttresses the resolve of regulators and policymakers, but also drives down costs and in turn leads to greater economies of scale.
How significant a role are institutional investors playing?
There’s increasing interest — there have been escalating commitments from early movers like CalSTRS and NYSC, and some insurers are also stepping up. But the level of activity thus far pales in comparison to the scale of the opportunity. When you look at where we expect capital flows to ultimately come from, there's a particularly striking gap in the institutional investment sphere.
Why is that?
It's a combination of factors — some of the investment vehicles used for clean energy investment can be very different from the vehicles that have enabled the massive buildout of high-carbon infrastructure. The green bonds market is a classic example -- it's burgeoning, but not yet approaching the optimal level of scale and liquidity. There's definitely more investor appetite for green bonds, but we need to see more corporations and government entities getting past the first hurdle and doing initial issuances.
What's the pitch to institutional investors? Why should they care about clean energy?
The major component of many institutional investors' portfolios that's devoted to energy is still largely high carbon. But that's not the future: the world is moving away from that, and a lot of those resources bear tremendous stranded-asset risks. When you juxtapose that with the clean energy investment opportunity, and the forecast in terms of where we're going — because of cost declines in clean energy, and also because of the Paris agreement and other policy commitments — it’s quite clear where the upside opportunities lie.
The mechanics of getting there, and the development of different investment vehicles that meet the profiles of different classes of investors — that’s where some catching-up needs to happen, building on proven clean energy investment tools. But we see ourselves on this pathway in a very real and concrete way. Investors should be open to taking a big-picture view of the energy transition that's underway.
What are the big unanswered questions for the clean-energy sector?
There are some uncertainties over exactly when and how some of the providers of energy are going to evolve. There's still an opportunity for many utilities, especially in North America, to adapt their business model to be aligned with clean energy deployment, but there’s uncertainty over which ones are going to evolve, and which ones are going to go the way of the coal companies.
And the same is true of the oil and gas majors — the Saudis have committed to make a striking transition, and we've seen Statoil (NYSE: STO) making a big foray into offshore wind, but what are we going to see in terms of Exxon (NYSE: XOM) and Chevron (NYSE: CVX) and so forth? There are real questions about which of the big oil companies are going to pivot, and push to retain long term value. We know the low-carbon transition is going to happen, and many different entities still have opportunities to position themselves as winners rather than losers, but there's a lot of uncertainty about which companies will take those opportunities.
Absolutely! It's certainly not advisable to be making big forays into high carbon at this time — that's where the principal risks lie. On the clean-energy side, it's all about finding the right opportunities that meet the risk-return profiles for different classes of investors. But there's no question that the opportunities are out there. Clean energy, not high carbon, is where the dollars are expected to flow.
Ben Whitford is the U.S. correspondent for The Ecologist. He has written for the Guardian, Newsweek, Mother Jones, Slate, and many other publications.