Four climate investors discuss the current surge in investment opportunities and the potential risks involved.

• While clean energy is gaining billions of dollars, climate investing is still in its early stages as four investors in the space suggest.
• Recently, Eli Aheto, managing director at General Atlantic's climate initiative BeyondNetZero, stated at CERAWeek by S&P Global that "we're in the early stages."
• Apollo partner Brad Fierstein stated that money chasing space is only a small fraction of the vast opportunity available.

The transition to a greener economy is gaining momentum, with billions of dollars in investments, but experts predict that the trend is only beginning to pick up speed.

Eli Aheto, managing director at BeyondNetZero, stated at CERAWeek that "we're in the early stages" and there is still "a lot of capital to be added" to the theme, which is broad and includes various technologies across different industries.

Aheto, along with three other experts in climate investing, participated in a panel at a Houston conference that explored the growing role of financial innovation in climate and cleantech. The panel was one of several focused on renewable energy, marking a shift from the conference's previous focus on oil and gas.

Clean tech funding back with a ‘vengeance’

In 2021, global venture capital funding for clean tech surpassed $43 billion, more than double the previous year's $20 billion, according to PitchBook data. Meanwhile, a separate study from PwC revealed that including other forms of financing like private equity, $60 billion was raised during the first half of 2021 across over 600 deals.

Apollo's infrastructure group partner, Brad Fierstein, stated that funding for space has returned with a "vengeance."

The financial crisis caused a decline in venture capital funding for clean tech, with more than half of the $25 billion invested between 2006 and 2011 being lost. This led investors to become more cautious about investing in the space.

Fierstein stated that the amount of money currently being invested in space is a small fraction of the potential opportunity for accelerating clean technologies and expanding investment opportunities.

Attracting new investors

Unlike during the initial phase of climate investing, the panelists noted that there is now a more established ecosystem in place. There is greater clarity regarding the allocation of funds and the types of projects being implemented.

Due to the rise in ESG investing, there has been a significant increase in capital inflows and shareholder activism. Additionally, the effects of climate change are now more apparent than they were ten years ago.

Philip Deutch, managing partner at NGP Energy Technology Partners, stated that there are a growing number of investors interested in the energy transition, including universities, private equity, venture capital, and major corporations.

But not all capital is seeking the same opportunities.

As the head of ESG Solutions at HSBC, Farnam Bidgoli has observed that investors are seeking different things. From her perspective, she has noticed a significant appetite among larger players, including institutional investors, for more mature sectors such as solar, wind, and electric vehicles.

While some technologies may be at an earlier stage or not immediately obvious in the energy transition, climate investing extends beyond renewable energy and has applications across all sectors of the economy. For instance, software that optimizes building efficiency and vertical farming that minimizes emissions associated with food transportation are examples of how climate investing can make a positive impact.

"Technologies that make the story a bit more complex don't attract as much investor interest," she stated.

Aheto invests in high-growth companies at BeyondNetZero, a climate venture from General Atlantic. He focuses on companies that utilize existing and proven technology rather than relying on new technologies. These companies must have a "real business model today that they can demonstrate by revenue and gross margin."

Apollo's Fierstein is concentrating on the development of offshore wind, stating that although the industry is established in Europe, it is still in its infancy in the US market.

The capital needed to launch these projects is immense, as it involves not only the construction of the turbines but also the development of port infrastructure, specialized vessels, and transmission systems, among other things.

The Biden administration is concentrating on offshore wind energy, with a goal of deploying 30 gigawatts of offshore wind power by 2030, which can supply electricity to 10 million homes. In February, the government raised a record $4.37 billion through the sale of six wind leases off the coasts of New York and New Jersey, marking the first auction of its kind under President Joe Biden.

Fierstein stated that there has been a significant shift in both investor demand and opportunity set, particularly in the areas of energy transition and climate change mitigation.

The lack of transparency in evaluating ESG metrics is a criticism of ESG investing, as "ESG" has different meanings to different people, and companies may be pressured to speak out on environmental and social issues, making it difficult to distinguish between fact and opinion.

According to Deutch, all labels are a "huge waste of time" and separating energy transition and energy security will result in negative outcomes. "We're all in the same boat ... we should spend less time trying to determine the most virtuous course of action because we need them all."

Bidgoli of HSBC stated that an exclusionary approach towards oil and gas companies is not always the best option. She believes that the oil and gas sector should be involved in decarbonization as hydrocarbons are expected to remain for years. She added that many of the "quick wins" in the next decade will come from opportunities in the oil and gas sector, such as reducing methane emissions, which are 25 times more potent than carbon dioxide in trapping heat in the atmosphere, according to the EPA.

Stretched valuations

The panelists identified both opportunities and risks, with Deutch emphasizing the risks of stretched valuations due to an excess of capital pursuing limited opportunities.

BeyondNetZero's portfolio companies are facing supply chain challenges, with Deutch stating that supply chain bottlenecks are particularly detrimental to early stage companies due to limited revenue and cash flow.

The lengthy completion time of some projects adds to the uncertainty surrounding policy implementation.

Fierstein stated that stability and predictable politics are what investors require. To attract private capital, it is crucial not to alter the rules.

Deutch stated that he cannot financially support any aspect of the U.S. political system due to its instability.

Philip Deutch, managing partner at NGP Energy Technology Partners, stated that he cannot invest money in any aspect of the U.S. political process due to its instability.