Climate-change concerns are one of the major drivers of where impact investors seek to put their money. But, as the example of investing in the solar sector demonstrates, investing in this type of asset can be a complex matter.
As Larry Fink, chief executive of New York-based investment giant BlackRock Inc., has said, just as other financial and economic leaders have said in widely publicized pronouncements, “I believe we are on the edge of a fundamental reshaping of finance.”
The risk is not so much about waiting for specialty investments such as green bonds to be further time-tested, or for solar-energy pricing to become more widely understood. The greater risk is being left behind by a rush of redirected capital. “We will see changes in capital allocation more quickly than we see changes to the climate itself,” Fink has said.
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Of course, no one knows what a mass transition to climate-conscious investing will ultimately look like. Many say the shift is not happening fast enough to counteract climate change and that financial giants are green-washing their inert habits. Others maintain caution around risk and returns .
Yet, billions of dollars are nevertheless pouring into investments striving to make a positive impact, led in part by major institutions, for example the Canada Pension Plan Investment Board that is now gauging investments through a sustainability lens.
So, there is a risk, market watchers say, in not understanding this transition and not having at least some exposure to, say, solar power and other renewable energy. This may be particularly important for high-net-worth investors with already complicated financial needs.
We will see changes in capital allocation more quickly than we see changes to the climate itself.Larry Fink, BlackRock Inc.
“The great opportunity is that the market performance of responsible, green investment offerings — whether it’s solar or wind or other forms of renewable energy, as well as responsible impact investments — are reaching returns that are at or beyond the market benchmarks,” says Adam Spence, chief executive officer of the Toronto-based diversified impact-investing financial services firm Social Venture Connexion (SVX).
“It’s adding another layer, which we believe mitigates risk,” he says. “The number of impact-investment opportunities in the field that we work in is growing by leaps and bounds every year.”
Environmentally and socially conscious exchange traded funds (ETFs) offer a degree of passive exposure, yet garden-variety funds sold by banks and retail investment companies can seem limited for investors seeking a more hands-on approach. This is where impact investing gets more complicated.
It may not be enough to simply diversify one’s portfolio overall by adding climate-wise investments. It is also important to consider further diversifying green investments within the portfolio, analysts say.
For example, instead of simply investing in solar-energy production, adding more diversity to a portfolio would also mean investing in solar storage or perhaps alternatives such as wind power, all to help mitigate risk.
“There are so many directions that we could go, that you can’t just go with solar and focus on that, because we don’t really know” which sustainable investments will dominate, says Mike Thiessen, chief sustainability officer at Genus Capital Management in Vancouver, an impact-investing specialist.
As the use of solar panels increases, the value of the solar energy itself can decrease. It’s simple supply and demand. If more solar energy is produced, yet demand doesn’t match that increase, the price of that surplus may drop — not the most enticing proposition for investors.
This then puts the onus on solar-energy storage to hold the energy for when demand rises relative to supply, such as in the evening hours. Or storage can help add energy to the grid to meet demand in other communities. This helps find new revenue, changing the investment picture.
“One thing we look at with technology like energy storage is that it is a way to future-proof some of these investments,” says Seth Mullendore, vice-president at Clean Energy Group, an advocacy and planning organization in Montpelier, Vermont.
“A large solar project of hundreds of megawatts takes a significant amount of time to develop, from the conceptualizing to getting contracts in place. And the market can look a lot different in, say, three to five years from the initial investment in a project. So, the original value proposition may have shifted,” he says. Storage then helps add value to solar-energy infrastructures and clean-tech companies as investments.
“A lot of companies have tried to create revenue opportunities by what they call value-stacking. So, stacking multiple different things that batteries can do and trying to monetize those. So, again, it’s that diversification of different value streams — that when it’s not doing one thing, it can do another,” Mullendore says.
Value stacking and liquidity
The question then is how to approach this value-stacking as an investor.
“It can be daunting because there are a number of different options,” says Thiessen at Genus Capital. “But if you know what your financial requirements are and what your constraints are, and the impact that you’re wanting to make, then your advisor or portfolio manager should be able to put together a portfolio for you.”
The array of investments varies widely. There are green bonds for co-operatives such as Toronto-based SolarShare, which offers five-year bonds to Ontario residents. Yet because bonds are held to maturity, they might play a medium- to longer-term role within an asset portfolio.
So, investors seeking more immediately liquid investments might choose more easily tradable green bond funds, although the direct environmental benefit of a basket of investments can feel diffuse — at least for investors who prefer to see a direct impact from their green investments.
Other options that are generally the territory of higher-net-worth investors may include direct private-equity or venture-capital investing in clean technologies or infrastructure, and even more philanthropic investments.
“We do have some clients that want a philanthropic impact, let’s call it,” Thiessen says. This may entail putting money into initiatives that might not be an investment asset per se. Programs helping to fund biodiversity in forests is one example, Thiessen says.
With solar energy, there are initiatives for new kinds of community solar storage, as well as storage within homes using appliance-like batteries. Initiatives seek to help rural or lower-income communities maintain their solar-energy supply, while also aggregating these small systems and turning them into virtual power plants. This adds value and can transform into investment assets, potentially lucrative ones.
As Mullendore of Clean Energy Group says, “Battery storage is the next tier. There may be another tier beyond that.” And it could mean continuing to rethink the market and better future-proof one’s portfolio to take part in what is coming next.