The head of sustainable investing at Apollo believes that the transition to clean energy should be accelerated.

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The geopolitical tensions in Ukraine have highlighted the world's dependence on fossil fuels and the need for a significant investment in clean energy. The International Renewable Energy Agency estimates that $131 trillion in energy transition investments are required by 2050 to achieve a true shift toward clean energy.

To learn about how Apollo Global Management will allocate its capital, Leslie Picker interviewed Olivia Wassenaar, who leads the firm's sustainable investing platform and natural resources. Wassenaar's team has already invested $19 billion in the energy transition and decarbonization and has pledged to invest an additional $50 billion over the next five years.

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Do you believe that the war in Europe has intensified the shift towards clean energy, or has it slowed it down as individuals recognize the need to balance the transition with maintaining the requirements of traditional energy sources?

Olivia Wassenaar: I believe that the current events have made us all understand the urgency of accelerating the transition. Despite the progress made over the past few decades, we still feel like we're starting from scratch. To achieve our goals for the future, we need to invest approximately $4.5 trillion annually in the energy transition.

Can you effectively ensure that nations, particularly in the U.S. and Western Europe, meet their short-term energy goals while also focusing on the long-term, or do you believe that the two objectives become confused due to the crisis nature of the situation?

We must transition to cleaner fuels eventually, but it won't happen overnight. Therefore, we need bridge fuels like LNG to take lower carbon fuels to areas that currently use higher carbon fuels such as coal and diesel. This is a gradual process that will evolve over time, and it's crucial to recognize this.

The global annual clean energy investment required to achieve net zero carbon emissions by 2050 is estimated to be $4 trillion. This amount needs to be invested within the next five years on an annual basis, which is a significant amount of money. Do you believe that private capital will provide this funding? And where else will the investment come from? What is the specific role of private capital in this investment?

Wassenaar: I believe private capital has a significant role to play in the energy transition and decarbonization, which excites me when I see Apollo's initiatives. Over the past five years, we have invested approximately $19 billion in this area. Moving forward, we aim to invest $50 billion over the next five years in various forms of capital, across the capital structure, and throughout the climate ecosystem, to drive change and capitalize on different investment opportunities.

How does private capital's role in traditional sources of energy impact your investment decisions in cleaner sources of energy?

Wassenaar: Our focus has been on assisting traditional energy companies in achieving their targets and transitioning to more environmentally friendly practices. For instance, last year we invested in an eco-friendly compression company that helps oil and gas companies reduce carbon emissions through natural gas compression. This investment aligns with our view that it is crucial to support these companies in their journey towards sustainability.

What is your perspective on the valuation differential between clean energy and clean energy-adjacent investments versus traditional energy companies, given the increased focus on clean energy and the recent raising of multibillion-dollar climate funds from both infrastructure and private equity standpoints, as well as private credit funds?

Wassenaar: I am thrilled to see the significant amount of capital being invested in this space. As we previously discussed, there is a massive need for capital in this area, so the more capital that flows in, the better. There are so many opportunities to explore. When considering valuations and our focus, we have identified areas within the value chain of the broader ecosystem where high valuations are being assigned. At Apollo, we have focused on areas where there is both value and opportunity. For example, we have spent a lot of time researching services related to the energy transition. Rather than just investing in a wind farm, we have invested in businesses that provide logistics and maintenance services, such as rotating out blades or gearbox maintenance, as well as staging in and around assembling a wind farm. These services are priced right for private equity, offering a private equity rate of return while still being critical to the energy transition.

Are private debt sources suitable for these businesses seeking alternative sources of credit? Are they profitable enough to obtain credit from you?

Wassenaar: The answer is that it depends. While some companies may not be ready yet, the industry has grown significantly, especially in wind and solar. There is now the ability to finance these businesses as well as others like biofuels, bioenergy, and batteries. However, some newer, earlier-stage businesses may have a technology risk component and may not be suitable for debt financing at this point. Apollo is having early-stage conversations with these companies to ensure that they are well-positioned to provide capital when the time comes.

What does it mean for your portfolio companies when people associate natural resources with inflation? Is it just that these companies have exposure to natural resources, and their margins will improve? Or is there more to it than meets the eye?

Wassenaar: Inflation has a significant impact on our portfolio, and every company is unique, but we can see it affecting our operations. Last week, I was with one of my businesses in Texas, and we discussed the challenges of obtaining trucks due to supply chain issues and rising prices. As a services business, we rely on trucks to transport our employees and equipment, and this has become increasingly difficult due to inflation. However, our perspective on this issue has changed significantly since last year.

Can you share your insights on how the sustainability market has evolved over time, given your extensive background in studying and working in this field?

Wassenaar: Despite the many changes, it has all been positive. It has been 15 years or more since I arrived, and some companies have risen and fallen. However, the financing years were challenging. Today, I am thrilled to see that energy transition and decarbonization-related businesses make up 60% of our natural resources fund at Apollo, which is an impressive feat for a mainstream private equity fund targeting 20% plus rates of return. As someone who has witnessed the sector's evolution from the early days of the World Bank, I am grateful for this wonderful transition.