The New Energy Landscape: A Roadmap for Impact and Sustainable Investors

By Marta Maretich, Maximpact Chief Editor @maximpactdotcom

Energy is set to be a key global concern for the foreseeable future; and to continue to be an important focus for the impact and sustainable investing sector.

The reasons for this are familiar by now: fossil fuels are becoming scarcer, energy costs are rising, levels of industrialization are increasing, as is global prosperity, bringing increased demand for energy as well as unwanted side effects from its use, like pollution.

Climate change is another factor driving interest in energy. A series of reports from the IPCC are shining a light on the urgent need to change the way we use energy as well as the types of energy we use. According its recent report, energy is responsible for 47% of the increase in anthropogenic (man-made) CO2 emissions; fossil fuel byproducts linked to climate change. High carbon-intensity energy, related to economic growth in developing countries, is an important contributor. These statistics mean that energy use is set to become an important front in the battle against runaway climate change.

Whether or not you accept the idea of man-made climate change, there’s little doubt that the IPCC’s reports will affect the outlook for investing in the energy sector. Right now, the UN is using them to inform its process of forging a new international convention on climate change. When this framework emerges in 2015, this in turn will have implications as governments react by establishing new policies, setting regulation and, probably, funneling more public money into mitigation measures.

All these factors; plus the fact that new technologies and approaches are proliferating; are making energy a focus for investors of all kinds, despite the fact that some alternative energy markets have proven volatile in the past. Today there are more ways to invest in energy than ever before and everyone seems to be looking for the technologies that will replace fossil fuels in our investment portfolios as well as our economies.

A multitude of solutions

Developments recent years seem to indicate that seeking a single solution to the energy question is the wrong approach. It’s more probable that there will be a wide array of approaches that form a patchwork of solutions for different applications. Many of these will be local, rooted in culture and geography, and investors who know how to spot an opportunity at the local level will reap the benefits, as will those who know how to support energy businesses as they scale up and roll out products and services on a wider basis.

But there is much more still to do if we are to meet growing energy demands while at the same time cutting emissions. Fortunately, there’s also increased scope for investing as the clean and green energy market grows and diversifies. Here are some of the areas to watch:

Known values

Solar power, wind power and hydroelectric generation businesses have long been staples in impact and sustainable investment portfolios. Global growth in the uptake of these technologies has been significant overall, at least partly due to government subsidies and policy support, and the worldwide demand for solar and wind power continues to skyrocket. Since 2009, global solar photovoltaic installations increased about 40% per year on average, and the installed capacity of wind turbines has doubled.

Against this background, some investors, like Triodos with its renewable energy fund, have already garnered considerable experience in investing in diverse energy solutions including hydroelectric, wind and solar. Others, like the Global Environment Facility (GEF) have been instrumental in financing specific energy technologies to fit local needs in countries as diverse as China, Mexico and Egypt.

Impact capital has played a role in bringing these technologies forward and rolling them out into new markets, sometimes riding the roller coaster of a new investment sector, as in the case of solar power. As a result, renewables now represent an evolved market and continue to have strong returns. With future outlooks positive, especially in light of advances such as new approaches to managing existing grids and new technologies coming online to improve energy storage thus making wind power more viable, these sectors remain good bets as we move into 2014.

IPCC top energy picks

The IPCC weighs into the energy debate with a new report flagging its top picks for alternative energy sources to lead climate change mitigation measures. In it, zero-carbon technologies join low-carbon ones, with both seen as essential to success. The list of top technologies they cite is controversial (even deeply flawed, according to some critics), yet the IPCC’s recommendations may turn out to be influential as the global conversation about new energy sources evolves. Certainly, it pays impact and sustainable investors to consider how they could usefully engage with these sectors.

Nuclear power

In a post-Fukushima world, nuclear power is more controversial than ever. Germany, a global leader in greening its energy sector, is set to phase out nuclear power entirely by 2030.

Nonetheless nuclear power is central to the IPCC’s plans for climate change mitigation. Though certainly not a “renewable”, as the report claims it is, nuclear is nonetheless a zero-carbon source of power and may be an option in some situations. Despite its drawbacks of danger and waste, it appeals to countries worried about energy security as well as those trying to wean themselves away from using polluting coal as a main source of energy. For these reasons, worldwide nuclear capacity is increasing annually, with countries such as Spain and the USA stepping up production. New reactors are going up in many counties including Taiwan, China, South Korea and Russia.

All this activity may hold opportunities for impact and sustainable investors who believe that nuclear may offer the best hope for a carbon-neutral future; as well as those who are willing to back an unpopular industry as it develops better, safer technologies. The good news is that advances in technology may change the outlook for nuclear soon. Molten salt reactors; which so far exist only on paper; could produce 20 times more power per plant, cast half the price of existing reactors and consume, rather than produce, nuclear waste. It’s worth noting that China has pledged to build one before 2050 and western countries too fastidious to take the risk may miss an important opportunity here.

Energy efficiency

The drive toward greater efficiency in energy use is already underway as rising fuel costs push consumers in every sector to find ways to get more out of their energy spending. The search for energy efficiency will create business opportunities in a number of industries including construction, where energy-saving design is becoming the norm, and transportation, where more efficient vehicles are cutting fuel bills for individual consumers, companies and municipalities.

Manufacturing will be an important growth area when in comes to energy efficiency. According to a recent survey, energy use is becoming an issue for top managers who now see it as key to bottom-line success. The drive for efficiency will create opportunities for growing businesses in consultancy and service delivery, too, as companies seek expert advice on how to optimize their specific processes: just six percent would know where to turn for more tailored advice, a recent survey reveals, and this is seen by managers as a significant barrier to investing in energy saving measures.

Biofuels

Biofuels have come in for a lot of criticism in recent years and now the United Nations has released a report officially warning that growing crops to make “green” biofuel harms the environment and drives up food prices. Still, biofuels are central to the mitigation pathways proposed by the IPCC, a fact that some critics, like environmental groups Biofuel Watch and the Global Forest Coalition, have attacked as “false” and “confused”.

This may not be sufficient reason to exclude biofuels from a green energy future, however. Promising new technologies, particularly those that convert waste into biofuel, may yet put this sector back on the map for impact and sustainable investors. A recent study found that biofuels derived from paper, wood and food waste could provide 16% of fuel needed for road transportation in Europe by 2030. On the other hand, the report warns that the successful commercialisation of these advanced biofuel technologies now depends on political leadership and adequate policies, a scenario that industry insiders fear is a long way off.

BECCS

Bioenergy with carbon capture and storage (BECCS or Bio-CCS) is another controversial technology central to the IPCC’s mitigation measures report. The process involves power plants burning biomass to generate electricity with the carbon created being extracted and stored underground for “geological timescales”. BECCS could potentially provide large amounts of carbon-zero electricity, yet there are doubts about how viable, or safe, it would prove in practice and so far no working plants are up and running. It may be years before BECCS can prove its worth; but watch this space as the idea of carbon capture as a necessary measure for achieving carbon neutrality gains ground.

And don’t forget…

In many ways, the IPCC recommendations for the future are notable for the many technologies they leave out of their vision of a low- and zero-carbon energy future. A quick scan of the alternative energy sector reveals a wealth of new approaches and processes the report ignores: micro-generation, hydrogen fuel cells and smart grids, to name only a few. There’s evidence, too, that large public utility companies are starting to change the way they provide energy, making them justifiable investments for impact and sustainable investors. Lifestyle changes leading to reduced energy consumption will also create attractive business opportunities, for example in the areas of smart metering, transportation and green building.

The list is long; and, happily, getting longer. Impact and sustainable investors would do well to have a good look around before deciding where to put their capital.

How to pick a winner

With all of these opportunities open to impact and sustainable investors, the challenge may be finding an effective focus when investing in energy. Where should we invest for maximum impact and delivering the most benefit?

To answer this question, investors should review their core values, determine their appetite for risk, and keep in mind the definitions provided by bodies like the World Economic Forum and GIIN. Employing evaluative tools like ESG and SROI can help narrow the search for the right place to put your capital, especially when it comes to mainstream investments.

In a rapidly changing energy landscape, however, there is no substitute for keeping informed. New technologies are coming online almost weekly. Known technologies are evolving, as is the political and regulatory climate. Investors with their ear glued to the ground and their feelers out will have the best chance of making the impact they want to make.

But the point isn’t just to pick a winner. Regardless of how effective the social investing sector is in bringing needed capital to a new energy landscape, there’s a bigger problem on the horizon, one that should concern all of us.

Despite massive IPCC reports and high-profile efforts by international bodies like the UN, there’s concern that the political will to deal with the problems caused by our energy use just isn’t there. C02 emissions have risen since 2010 and, with the upturn in the world economy, it doesn’t look like they’ll be falling any time soon. Global surveys indicate most world citizens are more concerned about economic development than they are about climate change. And look what happened to the flawed carbon trading system and the now defunct Kyoto agreement, our last attempts to tackle this issue.

Clearly, business as usual will only result in the deepening of our shared crisis. If impact and sustainable investors really want to make a difference to our future, they will have to do their part to fundamentally change the way business and finance works; and to convince others; governments, businesspeople, the public; that our way can deliver sustainable development and a viable future for the planet. To succeed at this, we will have to demonstrate that impact and sustainable approaches to finance really work. Let’s just hope we can do it in time.

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