The shift towards renewable energy is building, recording its highest growth rate of any energy source recorded in 2017.

Wind, solar, biomass and waste, geothermal, small hydro and marine accounted for over 55% of all the gigawatts of new power generation added worldwide. The rise represents a continued pattern of growth over recent decades (see below).

The trend is driven by: shifting cost curves as the cost of renewable energy declines, advances in technology (including battery storage, electric vehicles), regulatory changes and shifting societal expectations.

Asset allocation process

The low-carbon transition process not only presents investment portfolios with risks that need to be mitigated – it presents new opportunities that have the potential to diversify portfolios and improve their resilience to the effects of climate change.

These opportunities can be assessed through:

  • primary financing of new low-carbon/energy-efficient projects and/or assets; 
  • secondary markets and vehicles, such as low-carbon passive and active equity funds. 

Primary market investments are additive to financing the low-carbon transition process, and hence play a critical role in aligning portfolios to support and accelerate the transition to a lower carbon economy. Ceres (2018)10 recently examined the state of the renewable energy market and noted that it has matured considerably and now offers a diversified range of primary market investment opportunities including in clean energy infrastructure (wind and solar projects), storage infrastructure, grid technology, low-emission vehicles in the transportation sector and energy efficiency in the built environment.

These can be accessed in a number of ways, including: 

  • investing in infrastructure or private equity funds;
  • direct project-level investment;
  • buying securitised bonds or equity;
  • investing in green buildings;
  • funding the balance sheets of corporate developers in both debt and equity.

Global new investment in clean energy by sector in US bn

Source: Bloomberg new energy finance

In contrast, many of the secondary market opportunities that currently exist (particularly in regard to low-carbon indices) tend to involve re-weighting within existing capital allocations, rather than providing additional finance. This will depend on the definitions of the index construction, and on the extent to which the indices are designed to both minimise carbon emissions and capture the low-carbon companies of the future. As the private market in lowcarbon opportunities continues to grow, the availability of listed companies that are actively participating in the lowcarbon transition process will deepen.

As investors seek to capture these new opportunities to align portfolios with the low-carbon transition, there will inevitably be implications for asset owners’ asset allocation processes and decision-making frameworks. These issues have been widely debated across the industry (including in the TCFD final report and recommendations) and the processes and tools will continue to evolve to support these efforts. Nevertheless, there are some straightforward steps that asset owners can take today, using tools and resources that are already available (see below).

Immediate steps asset owners can take to evolve portfolios*

  • Engage with investment managers to bolster the integration of climate-related risks and opportunities into core investment processes.
  • Expand universe of opportunities to research, explicitly incorporating climate alignment and low-carbon transition as part of the search criteria.
  • Match potential opportunities and investment universe within the fund’s existing asset allocation targets.
  • Set and agree priority areas on the potential opportunities for further research.
  • Ask investment managers and consultants to investigate and present opportunities in the priority areas.
  • Replace fund managers/mandates where considered appropriate from a risk/return perspective.
  • Add new fund managers/mandates where considered appropriate from a risk/return perspective.
  • Review and report on these priorities and outcomes on an annual basis as part of the TCFD disclosure efforts.
  • Identify areas where the asset allocation ranges and portfolio structure might evolve in the future, including undertaking scenario analysis and portfolio alignment with the Paris Agreement goals.
  • Discuss and identify potential trigger points to consider altering asset allocation ranges. 
  • Review and report on these considerations on an ongoing basis as part of the TCFD disclosure efforts.

*Adapted from GIC (2015) Climate Change Investment Solutions Guide

Most of the investment opportunities presented in this guide fit within existing asset allocation frameworks: the immediate challenges for investors relate more to defining processes and building familiarity with the investment universe as part of undertaking due diligence and gaining exposure.

As the internal processes and knowledge of climate-related risks and opportunities improve, investors can also look to use quantitative techniques including scenario analysis and aligning portfolios with the Paris Agreement goals. This will support further portfolio shifts and a potential review of asset allocation ranges, depending on the asset mix of an organisation and its investment strategy and constraints.

Source Description 

Bloomberg New Energy Finance (BNEF)

Monitors and reports trends in renewable energy and energy efficiency investments, including clean energy investment trends on a quarterly and annual basis by region, asset class and sector.
Inernational Energy Agency (IEA Monitors, reports and produces forward-looking scenarios of the investment trends in world energy markets by region, sector and technology. 
Investment consultants (various) Provide investors with manager research and ratings on funds and assets that position for the low-carbon economy, both as an explicit component of the strategy as well as integration into core strategies. 
Morningstar/Sustainalytics  Sustainability ratings for global mutual and exchange-traded funds, using Sustainalytics’s company-level ESG research that includes consideration of carbon intensity, stranded asset risk and fossil fuel exposure.  
GRESB  Assess the sustainability performance of real estate, debt and infrastructure funds. Includes consideration of carbon management including emissions intensity, energy efficiency, risk assessments and reporting.  
Climate Bonds Initiative (CBI)  Monitor and report trends in the green, climate-aligned bond market including new issuance, investment activities, market trends and outlook and certification standards through various resources, updated regularly. 
Global Impact Investing Network (GIIN) ImpactBase  An online search tool with information on funds and investment opportunities that may fit with investor’s impact investment objectives (social and environmental factors). Includes private equity, fixed income and real assets.
PRI Impact investing market map  A resource for investors to identify companies that, through their products and services, generate impact in one or more of ten thematic environmental and social areas. 

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Defining what is low-carbon and climate-aligned

It is becoming increasingly important for investors to look through investment strategies and portfolio holdings to assess how aligned their climate-related investment policies and objectives are with their investment holdings. This is important for a number of reasons: 

  • It is fundamental for measuring exposure to the lowcarbon transition/climate alignment opportunities that are embedded into existing portfolios.
  • It will help to inform investment decisions around how portfolios need to evolve in the future.
  • It will support clearer communication externally to beneficiaries, stakeholders, regulators and other interested parties, in line with the TCFD recommendations.
  • For PRI signatories and investors seeking to commit to the Investor Agenda, it will provide the basis for reporting existing and future allocations to low-carbon investments.

A number of taxonomies and frameworks exist to support these efforts (see below). The European Commission has also released an action plan for financing sustainable growth that included developing a sustainability taxonomy, in response to the recommendations of the High-Level Expert Group on Sustainable Finance.

Anticipating further evolution in the taxonomies and frameworks that exist, the PRI encourages signatories to draw on the Climate Bonds taxonomy that aims to provide common definitions across global markets, and to draw on the Low Carbon Investment Registry taxonomy developed for institutional investors.

Examples of taxonomies and frameworks*

Low Carbon Investment Registry taxonomy 

Climate Bonds Initiative Taxonomy and Standards

IFC Definitions and Metrics for Climate-Related Activities

Green Investment Bank definition of “green impact”

ICMA Green Bond Principles & Projects Taxonomy

FTSE Russell Green Revenues

*Source: IGCC (2017) Road to Return: Institutional Investors and Low Carbon Solutions

Low-carbon metrics to measure and disclose

For investors to be in a position to measure, monitor and disclose their investments outcomes’ in terms of mitigating climate-related risks and capturing opportunities, they will need to consider using suitable metrics as part of their monitoring and disclosure efforts.

This is important for both thematic and climate-focused/ labelled funds and investments, as well as those that seek to more broadly integrate climate risks and opportunities into core processes.

Metrics

  • Carbon footprint: Measure the carbon emissions of the investment portfolio, which can then be used to compare portfolio emissions to global benchmarks, identify priority areas for reduction (including the largest carbon emitters and the most carbon intensive companies) and engage with companies on reducing carbon emissions and improving disclosure standards.
  • Green/brown exposure: Measure the exposure to green (low-carbon/climate positive) versus brown (high-carbon/climate negative) assets held in the investment portfolio.
  • Company engagement effectiveness: Monitor engagement outcomes, focusing in particular on whether companies are providing satisfactory responses to investor concerns and assessing how long engagement dialogue should continue for and what investment decisions will be taken if companies provide an unsatisfactory response.
  • Ratings and research: Use the outputs from one or more of the various climate-related data, research and ratings service providers as part of their assessment of climate-related risks and opportunities.
  • Scenario analysis: Undertake scenario analyses to assess the resilience of their investment portfolios to a range of possible climate-related impacts, including a 2°C or lower scenario.
  • Impact metrics: Assess the extent to which investment actions have had a positive impact on the portfolio and climate-related outcomes, including alignment with the Sustainable Development Goals (SDGs).
  • Adaptation metrics: Assess the preparedness of investee companies and entities to the physical impact risks associated with climate change.

Data sources

There are three main sources of carbon data that investors can use as part of their investment decision making, monitoring and reporting:

  • company-reported data (scopes 1, 2 and 3);
  • service providers’ estimates;
  • physical asset data provided by research organisations.

Data and metrics for adaptation to climate change are under development.

Useful resources for climate-related data and metrics

  • Company reported data, including Scopes 1, 2 and (to the extent available) 3 emissions
  • Recommendations of the FSB Task Force on Climate-related Financial Disclosures.
  • PRI guide on TCFD recommendations for asset owners
  • CDP Disclosure and Action Data Portal

Data and research sources including service providers’ estimates of company emissions and physical asset data

  • WRI, UNEP FI and 2Dii Climate strategies and metrics
  • Grantham Research Institute on Climate Change and the Environment Transition Pathway Initiative
  • Carbon Compass: Investor Guide to carbon Footprinting 
  • Frankfurt School/UNEP Collaborating Centre: Climate Metrics for Debt and Equity Portfolios
  • Mercer climate change study
  • PRI Carbon Footprinting Resources
  • Carbon Tracker Initiative
  • 2Dii/ET Risk Project
  • Oxford University Smith School of Enterprise: Asset level data and the Energy Transition

Adaptation analysis

  • Potsdam Institute Carbon Delta project
  • IPCC Fifth Assessment Report
  • University of Cambridge IPCC climate science briefings

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    How to invest in the low-carbon economy

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