Climate Finance - The Greatest Capital Re-allocation in History?

[Music] welcome and thank you all for joining us for this highlevel perspective um on what is being called the greatest reallocation of capital in recent history um but I don't know that it's Capital moving away it's not just a departure from hydrocarbons um but this is really a regeneration of capital into the Technologies um and into the the businesses that we need um to meet our energy transition challenge so this is a geographical shift it's a sectoral shift um and and really an excitement that's happening in the sector we have four Founders or CEOs of really distinct firms operating in this space sir Chris hone founder of uh the children's um um investment fund rishik kapor co-ceo of investor uh fabr dumontel the founder and CEO of Eiffel and Peter orag CEO of Lazard so really Fant fantastic uh group here I'd like to start with uh with sir Chris if that's all right um your experience is uh probably a bit different as a as an activist investor as an investor uh you know advocating uh for certain regulatory reform um how do you see your investment work in parallel with your philanthropic work in sort of moving the needle in regulatory reform in the space um but also in in looking for you know what's investable thanks um yeah my work in investing helps inform my philanthropy where um the foundation that I endowed is one of the largest funders in climate change the the most important point to make is the transition that is needed is not going to to happen without massive change in Regulatory and Taxation framework and and and in addition government subsidy the um the green technologies have a a price premium a cost they need to be advantaged versus dirty Technologies uh significantly um otherwise we will never see the trillions of of dollars that we need to see coming into that we we we we heard us a nice example um of someone saying Returns on solar simple example were 6% how can that make sense for them to invest in that versus um government bonds at or bonds at 5% yep especially in in in low-income countries taking currency risk and political risk so and the and the reason is that there's no penalty for fossil fuels and no advantaging of green fuels the the externality isn't priced and isn't regulated and so there's this huge myth that I would love to burst that this transition is is is is is going to happen without massive change in regulation Taxation and subsidy strong response there in our audience and I think we'll we'll get more to what those incentives in the regulatory uh reform might look like certainly we're seeing a lot in the US right now um I'd like to go now to Risha kapor who is co-ceo of investor investor of course is uh organic and local to the GCC based in Bahrain a more traditional private Equity approach um Rishi how is investor internalizing climate Finance as uh as an opportunity um but also in terms of these you know broader shared goals of of meeting our Net Zero targets um and are you seeing or will you be allocating um specific investment funds or vehicles for this purpose yeah thanks Karen so you're you're right you know uh when you take a firm like invest cor that specializes in private investing all over the world the way we look at our responsibility when it comes to managing uh climate risk managing climate adaptation and the associated transition but also being a proactive allocator of capital to facilitate that transition I break it down into into three components the first not surprisingly is our responsibility as a corporate right uh as a company now we are a Professional Services Company so it's not that hard but it is important for us to put ourselves out there UPF front and lay out our own Net Zero Journey our goals our objectives and we've been pretty pretty clear about the fact that using science-based targets we aim to achieve Net Zero as a company in West Corp um by 2050 but that to me is just the foundational layer you know if think of it as 10% of our overall effort another 30% of our effort goes towards looking at our portfolio of Investments we have more than 70 companies that we've invested in globally all over the world and those are just companies in addition to that that we have about 11 close to 12 billion dollar of real estate assets that we own all over the world working with those companies with those properties and helping them navigate their own decarbonization Journeys their own path to Net Zero over the long term is equally important for a firm like invest Corp not just to embrace but to drive to show genuine uh leadership on and we've done precisely that as well now that the com complexity in doing that stems from the fact that as a private investment firm our hold period is typically four to five years the journey is 20 to 30 years right so we can we can lay out an agenda we can mobilize the necessary resources working with our invest companies and our properties but in more cases than not we are unlikely to see it through to the end game so what we need to do is create enough moving inertia such such that it sustains itself on its own even if we are no longer owners of that asset in four or five years from now and that's you know as I said that's like 30% of the work that a firm like invest Corp ought to do and be in particular are doing 60% of our effort is really mobilized towards embracing what is likely to be and I love the tagline of this of this discussion one of the most disruptive allocations of capital that the world has seen certainly a once- in a generation opportunity from the perspective of an investor looking to generate and Target strong risk adjusted returns over a medium to to long-term Horizon to us it seems somewhat similar to what the digital disruption was to the overall you know economic landscape affecting virtually every industry that make up an an economy in in in its so and the same thing applies in in the case of of climate helping corporates and consumers worldwide decarbonize reduce their emission Footprints requires a reagin ination of products of services across all sectors of Industry uh and that reimagination in in turn is going to be fueled initially by Innovation but once that innovation has happened which is the case the estimates are that 2/3 to 70% of the Innovation necessary to achieve Net Zero is already behind us the trick now is taking that Innovation converting it into commercially proven Solutions and then accelerating the adoption of those Solutions such that to Chris's Point earlier the price point comes down and they can be made affordable uh such that consumers and corporates can in fact adopt and embrace them that's where Capital risk capital in particular particular the kind of capital that invest cop specializes in providing which is what we've done for Four decades now becomes so impactful right so recognizing that opportunity recognizing our own DNA in that space we have established a dedicated effort our climate Solutions platform that is going to Target growth Capital Investments solely in companies whose primary product or service or technology is all about helping decarbonization that's it investing in companies globally around that premise and our ancillary objective in addition to tapping the massive growth potential that sits in that space is to also achieve that affordability Factor right that reduction in price point such that the global South which is probably a part of the world that is most impacted by climate change but also least able to address it headon help them be able to afford and embrace these new products and services and Technologies so that they can combat the risks so that's that's how we are looking to to lay out a full you know holistic road map uh at invest in terms of say not just climate change but climate Finance climate investment and climate return I'd love to come back to this sort of timeline and and the way that you are um are making Investments and how you would incorporate kind of a profitability into that timeline but but I want to go to fabis um and and ask a sort of similar question um I mean how does your firm fit into the capital stack that that Rishi is sort of describing here there's a lot of different kinds of opportunities the the number that's been thrown around from that McKenzie study that study was almost 10 years ago my husband was a partner of Mackenzie he worked on that study and I think the the the logic has changed perhaps um but you know there's there's still a you know sort of a traditional project Finance which is necessary but also the the financing which REI describes towards firms the scalability um so maybe you could talk to us a little bit about how you see investment opportunities the sort of granularity of um of the firms and technologies that you're interested in in investing in yeah thank you um I think you're right the the um this Capital relocation is not only the greatest in terms of the Quantum of capital needed but also in terms of its complexity to to make the climate transition of course we need uh to make uh investments in in a few hundreds or a few thousands of of Mega projects the the very large offshore wind farms the jiga factories for Batteries H2 electrolyt Etc but that's the easy part I would say the challenge is really to make the millions of smaller Investments very granular very decentralized on rooftop solar on small scale uh renewable energy as well as the Myriad of Investments that are needed to to basically decarbonize each industrial each office building each home each plane car truck Etc it's a it's a it's a very I mean renewable energy is very different from the um from the the traditional coal oil and gas or nuclear in that in that respect and so the the the financial system needs to and that's us today the financial system needs to adapt to be able to finance those those millions of projects and basically that means that institutional investors need to to partner with uh local Regional asset managers who can sort and Implement those those Investments on the ground that's very difficult very complex but otherwise we we'll miss 75 or 80% of the uh of the energy transition um my firm Investment Group which is specialized in climate Finance very small compared to to invest Corp we have approximately 10 billions of Euros of of capital but we specialize in this in this very granular approach in the past five years alone we've financed more than 3,000 uh companies and renewable energy assets all across Europe so that's wind solar biog gas EV charging points Etc each asset is is very small individually a few megawatts a few million euros of of capital expenditure but there are many of them with our existing funds we we will increase that number to to to 10,000 and we we hope to go beyond that um one one last remark uh I mean making these very granular Investments is very challenging but it's also a solution to the risk return issue that was discussed just before as the smaller Investments very often have better risk return profiles of course most of the money goes to the mega projects and and it leaves the funding gap for the smaller assets so aggregating portfolios of smaller granular assets is a way to uh at the same time accelerate the climate transition and to continue generating very robust returns for investors thanks Fe I want to get back to the question of um well how investors find these opportunities but also then what the role of policy is in in sort of encouraging that so I want to go to to Peter orag and ask um you know how is the industrial policy landscape changing in the US it's changing a lot um and and how does that prove the case for largescale manufacturing and clean energy like the IRA but then as a you know in your business how does this affect your choices about allocation um and Geographic considerations and you know and maybe Lazard is a little bit different you're both an asset manager and an adviser so you know how does that fit into into your strategy now all right let me do uh The Good The Bad and The promising so the good is if we sat in this room a decade ago or 15 years ago and tried to predict the course of the cost of alter alternative energy production almost everyone in the room would have gotten wrong that the cost of uh utility scale solar has fallen by 83% since 2009 and the cost of uh onshore wind has fallen by 63% since 2009 according to the Lazard levelized cost of energy studies so that's good the bad is that financial markets actually now are paying attention but the the degree to which the uh emissions are being penalized is inadequate so uh Lazard also has a new climate Center we have shown that uh financial markets do penalize emissions every 10% increase in emissions all else equal has about a half a percent impact on the price to equity ratio so it is coming through and it varies across Industries and sectors but that's a pretty weak signal um so it's there but it's not strong enough and another reflection of the disconnected markets is if you look at U for example the projections necessary for oil production to get to Net Zero and compare that to the either the analyst forecast or the uh forecast embodied in current valuation of many oil producing companies there is a massive disconnect between the market and The Net Zero pathway in terms of what people think will happen so that's the bad now what's the promising uh I completely agree that what needs to happen here is stronger signals from policy to change all of that Dynamic um but I'm gonna get to the promising But continuing to just say it has to be a carbon price is going to lead it's the road to nowhere so what we need to do is take what we can get and let me give you a couple examples I mean the obvious one is the inflation reduction act maybe we can come back to that but that's an obvious one two other ones that might be less obvious first received almost no attention but a couple weeks ago the Biden Administration issued a new uh A4 which may seem very obscure it dictates the discount rate that the US government uses to evaluate everything that the government does in terms of cost benefit analysis and in particular particular it reduced the discount rate the US government will use for long-term analyses like on climate interventions to 2% and if you think that that's not a big deal moving from 3% to 2% sounds really small it's a one-third reduction in the discount rate that moves the social cost of carbon from $56 a ton to9 more than $195 a ton so onethird reduction in the discount rate more than threea the social cost of carbon that is then used to evaluate government policy there's an example of moving government policy you know that's not a carbon tax second example that I'd highlight is the opportunity for a super Brussels effect um through a combination of the EU and the US forming standards or forming blocks in particular sectors and the most immediate and the most promising example of that is the opportunity for a set of green aluminum and steel uh Arrangements that would form a super block around the US and the EU effectively setting Energy Efficiency standards in those important sectors and if the EU and the us get together on something like that it will change production not only in the EU and the us but across the globe because the combined economic impact of those two markets is really powerful so there are lots of things that governments can do even apart from a pure your price signal that would be very promising and helpful uh while we you know wait for gdau and yearn for a a carbon tax to be imposed and I didn't answer your question about what we're doing but I figured my time is up anyway no that's fantastic we still have a good bit of time so I'm going to go for another round I Wonder Sir Chris do you want to react on these sort of policy plans and what you think works that's absolutely right the I didn't mean to say a carbon tax is the only tool there there there are three tools for policy carbon pricing um which by the way we have to some degree in Europe already with the emission trading scheme so it's not in every region a fantasy it's having an impact there in in many sectors um but the uh carbon emission standards is absolutely a necessary thing you know that so that and and they have to be applied to every sector of industry and transportation not not simply um energy production all sectors so what it would mean is you can't produce a ton of Steel a ton of cement chemicals uh shipping uh emissions would be limited by regulation and uh and um and there'll be phasins okay same thing for aviations sustainable aviation fuel and you can call them standards regulations in the same way for a car emissions are regulated yep you can't just have a a car which can pollute in or a truck any amount and so we're going to need to find political will to impose those standards in a very strict and and and and ratcheting Manner and the role a key role for for people in business people in influence has to be to advocate for those standards and Industry in particular needs to advocate for them because politicians follow they don't lead and as an investor I'm always asking the industries I I invest in to and to to push for regulation and it doesn't happen in a vacuum okay this is probably my most important point is um all these returns that people are talking about making there are high returns from investing in the green transition the they're not there without the regulation and we're and and let's make another fundamental point we don't have the time okay we're already out of time and so to think that we can Tinker around and and do incremental ism is ridiculous and pretend that things are happening what's happening emissions keep Rising every year and the idea that when we Peak somehow that's the problem is fixed ridiculous okay it has to go to to zero not simply Peak and it has to happen quickly so the scale of the problem is so huge and so urgent that only let's call it radical policy change now is going to have any hope and the and what's missing is that all these people in influence with money and relationships and uh uh need to be making this case aggressively because we see President Trump announcing that he's going to gut and and repeal the IRA former president Trump former president Trump thank don't cause us more anxiety today than we need and and and so yeah that's that's I don't want anyone to live and pretend that you know rearrange deck chairs on the Titanic and pretend you know that little Investments here and there are going to fix the problem yeah and and the acid test is emissions keep Rising yeah well it's not little Investments though right I mean the UN Agency for you know for trade development thinks we we will create a market of maybe and a half trillion dollars of uh of manufacturing and goods related to decarbonization so that's a tremendous investment opportunity right emissions keep Rising year after year fossil fuel use keeps Rising so that's the asset test I would love to just have a quick round we have three and a half minutes or so of you know to that point what what are your favorites what do you see as investable where are you most optimistic uh I mean sir Chris makes the point that yes we need a a more strict policy sort of momentum into identifying what those Technologies and what those businesses look like and encouraging them to grow but right now what do you see I mean Rishi we've talked about concrete for example but what do you see as a as an opportunity I mean look I'll just be very very direct and very specific um we've identified four areas that we feel are the most promising amongst the whole lot and those four areas are defined by one common consideration which is there is already some momentum um in those first not surprisingly is actually carbon management and what I mean by carbon management is carbon accounting reporting you know you need to know what where you're at so that you can actually Implement action plans to address you know where you want to go forward going forward carbon trading is included within that carbon capture direct removal of carbon Etc all with within carbon management second is mobility electric vehicles have got the the ball rolling but micr mobility and everything else that is around it in terms of the data associated with managing charging stations Etc is the second third to your point is the built envirment it's a third of total Emissions on an annual basis you know just we we've made an investment for instance in a company that provides a low carbon alternative to to concrete panels right it's an ideal illustration of what lies within the realm of the possible and and fourth is food and EG right that's also 20 plus percent of total emissions there's ample opportunity over there to continue to decarbonize and reduce the emissions footprint with whatever has already happened in terms of innovation and adoption excellent Peter well look on the asset management side of our business we are uh applying a climate perspective across the board not for for ESG for esg's sake but because we do think over the medium to long term uh both the physical risk and the policy implications are relevant so there's not one sector but it's across the board on the advisory side I think that the wobbles that we've seen over the past uh three to six months in Renewables will play through and so there's a ton of activity uh in wind and solar that uh were involved in obviously a lot of hype but a lot of underlying reality on on hydrogen and then um critical Min minerals where despite the fact that uh well where there's going to be a lot of investment excellent so you're predicting a cost curve change in especially in Wind that's interesting um febis yeah I think uh we're still seeing a lot of value and a lot of opportunities in in simple renewable energy so wind solar biog gas geothermal in Europe at least it's it's now on bar with traditional energy sources in terms of of cost so very very promising and and there is still a lot to do in terms of investment sir Chris any favorites um my uh we we find limited opportunities because the returns are not sufficiently advantaged by policy as I keep saying yeah all right well there you have it four different perspectives from four very interesting and active firms in this space thank you all great great panel thank you