According to renowned environmental scientist Jonathan Foley, climate change may be the single biggest opportunity in human history: “We have to reinvent our energy systems, our food systems, our manufacturing, our cities,” says Foley. Consumer behaviour suggests that this reinvention is already well underway. Charging stations for electric vehicles proliferate in our neighbourhoods, roofers are swamped with work as home-owners clamour to install solar panels, and almost every major supermarket chain now has its own-brand meat alternatives.
“I think the general population has been aware of climate change for a while, but in recent years there’s been a broad understanding that it’s not only real, but it’s happening now and it’s happening fast,” says Nicolas Baumgartner, Impact Investing Specialist at Julius Baer. “People are experiencing the effects of the changing weather patterns, such as heatwaves, forest fires or flooding, and the realisation has dawned that these changes will continue unless we make significant efforts to reduce carbon emissions.”
Government incentives and regulation are creating tailwinds for climate investing
The shifts in consumer behaviour are just one of the factors driving a genuine revolution in how our economy works. “The lower cost of renewable energy production is another huge factor,” explains Baumgartner. “Nowadays it’s roughly at par if not even cheaper than oil and gas, so there’s no reason to pay a premium to have renewable energy production.” This is in stark contrast to the first wave of climate investing, when clean technologies were not cost-competitive enough to be commercialised at scale.
On top of this, government incentives and government regulation are creating tailwinds for climate investing by encouraging the use of renewable energy and more sustainable products and solutions. “You have essentially two approaches,” says Baumgartner. “The US approach is centred around incentives, with the Biden administration passing a number of policies and committing half a trillion dollars’ worth of support for cleantech infrastructure and new climate technologies. Then you have the European approach, which is centred more around introducing regulations, but in a positive way. Under the Carbon Border Adjustment Mechanism, for instance, EU-based companies will need to abide by the same standards for carbon emissions for production sites located outside of Europe as if the goods were produced in the EU. These regulations aren’t always popular, but they also mean that financial institutions and private market funds need to report what their impact is on the environment. That makes investors and institutions think a little bit more about what they do in that space.”
Developing new technologies along the value chain
These tailwinds have helped to engender an ecosystem around climate investing, particularly in the United States and Europe. “There’s a lot happening in and around Silicon Valley,” says Baumgartner. “The pool of tech talent there, who might have devoted themselves to other kinds of tech a few years ago, are now waking up to the opportunities of climate technology. In Europe and Israel too, you have a number of clusters, often linked to universities, developing fresh ideas.”
Those participating in the research and development behind these new climate technologies are not focused solely on renewable energy sources. “People often have wind turbines in mind but that’s really only one piece of the puzzle,” says Baumgartner. “It’s not just about producing the energy but investing in the technologies needed to transform the existing infrastructure. The production of renewable energy is intermittent – it only takes place when there’s enough wind or sunshine or water in the reservoir – so we need battery technologies to store all that energy.”
What’s more, power grids are needed to transmit the energy produced. “It’s not only a question of developing the infrastructure but also the software to balance demand and supply.” Baumgartner gives the example of newly developed virtual power stations that arrange themselves to supply the right amount depending on demand. “It’s the same with electric vehicles. It’s not just about producing the actual cars but developing the software to ensure they don’t all charge at the same time and overload the grid when electricity is already at peak prices for customers.”
Using technology to protect nature
The world’s growing population and the risk of a decline in available agricultural land due to climate change means that new ways to produce food are needed to feed the planet. Vertical farming, newer generations of fertilisers, and automated precision harvesting technologies will play a key role in the transition to sustainable food production.
Baumgartner was recently involved in discussions with an early-stage company that combines artificial intelligence with beekeeping to enhance crop yields. “Bees are critical to biodiversity and crop yields because of pollination. The fewer bees you have, the smaller the crop yield and the lower its quality,” he says. “This company develops devices that analyse the ‘conversations’ among bees to understand how they feel. By eavesdropping on the bees in this way, the company develops solutions to improve their wellbeing and in turn helps them encourage pollination and increase the yield of crops. The use of technologies together with nature is creating some really exciting solutions.”
Helping innovative companies grow through private market investments
Private market investing is a key driving force behind the rise of these new technologies, providing early-stage and growth financing not otherwise available from public markets. Nicolas recommends private equity as the most suitable asset class for investors seeking to have an impact. “Through private markets, you can invest directly in earlier-stage companies that haven’t yet IPOed on public markets. In a sense, you’re helping innovative companies grow by giving them capital that isn’t available from banks.”
The involvement goes beyond a financial injection. “As an investor in private equity funds, you also enable companies to have access to expertise and network know-how from specialist fund managers who will work closely with the companies for a period of, say, five to eight years. This gives more control over the company than you would get on the public markets where you have far less scope to influence management. “It’s an effective way of ensuring that the company is meeting certain ESG standards and is improving them,” says Baumgartner.
Over USD 82bn were raised from private markets for climate solutions in 2022, representing approximately a third of all venture capital investments made that year. Two main markets are leading the innovation: the United States, and Europe (incl. Israel).
Diversify your portfolio in terms of return and impact
As with any investment strategy, diversity is an important factor in optimising your returns. “Climate investing is a broad category so you want to be exposed to a wide range of different technologies because some will grow more than others. Early-stage companies might come with higher risk, but they could also offer greater potential.”
As he explains, it’s also important to diversify your portfolio in terms of impact. “There’s a selection process not only on the commercial side but also the impact side. If you only invest in a certain type of battery technology, for example, you’re restricting yourself to a very narrow field. Other technologies might emerge that replace that battery and render it obsolete. So it’s vital to think holistically about climate investing and its impact, not just in terms of risk and returns, but also in terms of the impact that the solution or technology might have.”
This places particular importance on fund selection. “There are a lot of fund managers out there who claim to do climate investing, so it’s crucial you can rely on a team that scopes the market, does proper due diligence, and differentiates the promising investments from the less promising – both in terms of returns and impact.”
The road ahead – creating lasting change
What are the factors likely to drive climate investing going forward? “We don’t have a crystal ball in terms of which individual technologies will win out,” says Nicolas. “Clearly, some will perform better than others. But if you diversify well enough, you’ll benefit from very strong underlying trends, driven by consumer demand, government policies, geopolitical developments and the cost of energy production."
He explains that climate investing has also become an attractive investment opportunity for those primarily focused on financial returns rather than environmental impact because the undercurrents are different from purely macroeconomic factors. “Climate has become an important theme in enabling investors to diversify away from more traditional industries. Just as you might want to invest in healthcare or real estate because those two sectors are not closely correlated, climate investing offers you a good way to diversify your portfolio between technologies underpinning the energy transition and traditional sectors such as healthcare and real estate.”
As a growing range of investors focuses on climate solutions and the number of funds being launched increases each month, it seems inevitable that the universe of climate technology companies will continue to expand in the coming years. Nicolas believes that the disappointments that accompanied Climate 1.0, the cycle that unfolded a decade ago, are unlikely to be repeated. “The rise in climate investing this time around is deep-rooted. Most of the new technologies are already seamlessly at work. Like climate change itself, climate investing is not just a theoretical concept, but something that we are already experiencing.”