April 05, 2010

When major institutional investors and venture capitalists start investing in alternative and low-carbon energy companies, it is noteworthy.

Mindy S. Lubber, president of Ceres, a Boston-based coalition of 80 investors who support climate change legislation and manage over $8 trillion of assets, said 85 percent of funding for alternative energy companies will stem from large institutional investors, pension and hedge funds and private equity firms, not governmental support.

Transforming the energy business in the United States will require $10 trillion over the next 20 years. But so far, financing has been modest with $140 million invested in clean technology, a figure that is expected to rise to $190 million in 2010.

Ceres' institutional investors contend that the energy industry must transform or face eroding market share. For years, many scientists and environmentalists urged utilities to adjust their business model and shift from coal-generated electricity to increased reliance on natural gas, nuclear power, wind, solar and other renewables. Now major investors are seeing dollar signs in alternative energy.

At the 2010 Investor Summit on Climate Risk, organized by Ceres at the United Nations in January and attended by more than 400 investment professionals, one investor said utilities are in the same situation faced by General Motors in the early 1980s. The utilities that cling to coal and the status quo will fade; the energy companies that adapt to alternative energy will survive.

At the summit, financier and billionaire George Soros, president of Soros Fund Management, urged investors to mobilize funds into alternative energy. Momentum will build when $70 billion in stimulus money is poured into alternative energy. Soros recommended that the International Money Fund invest $100 billion of its gold reserves into global renewables and low-carbon companies. He told investors, "This is the time to be proactive, not to sit back. Hedge funds can play a lead role."

Anne Stausboll, CEO of California Public Employees' Retirement System, the largest public pension fund in the United States with over $200 billion in assets, said it was making long-term investments in clean technology and renewables.

"To sustain investment performance, we need a clean, sustainable environment, conserving natural resources, mitigating risk and that entails pursuing alternative energy opportunities," she said. CalPERS has plunged $1 billion into clean energy ventures and is looking to double and scale up that funding.

"Our research has confirmed that high-carbon-intensive companies will underperform relative to low-carbon companies," said Kevin Parker, the global head of Deutsche Asset Management. He calls the movement to low-carbon and alternative energy a megatrend. "We expect it will only continue and accelerate going forward." Deutsche's Climate Change Advisors recommends investing about 6 percent of one's total portfolio in clean energy, energy efficiency, water and agribusiness.

Adapt Now

Alternative energy is not just an environmental issue; it is an economic transformational issue, noted Jeremy Oppenheim, director of Climate Change Special Initiatives at McKinsey & Company, which has done extensive research into the economic implications of climate change. Oppenheim urged institutional investors to ask utilities what they're doing to adapt to new energy efficiencies and implored venture capitalists to seek out companies specializing in new energy technologies. "There will be winners and losers," he warned.

In 2010, utilities face the same rapidly transforming environment that computer makers encountered in the early 1990s, suggested Alan Salzman, CEO of VantagePoint Venture Partners, based in San Bruno, Calif. NCR, Wang and Digital Equipment Corp. didn't anticipate the challenges from Apple and Dell and either faded or were eclipsed. Utilities open to new technology and innovation may face the best chances of survival. "The grid is being updated; it's archaic. Solar is coming," Salzman said. If government policies level the playing field and slow subsidies for coal, change will accelerate.

European investors are also shifting funds into alternative energy. Bjarne Graven Larsen, chief investment officer of Denmark-based institutional investor ATP said, "We believe that the ability to handle climate risk and exploit climate opportunities will be important for the future in constructing your portfolio." To that end, ATP inaugurated a $2 billion climate fund to finance investment in low-carbon and renewable energy companies in emerging markets.

Some utility CEOs have resisted the call to change and consider coal cheap, abundant and resilient. But Ceres' Lubber said she has walked the halls of Congress with Peter Darbee, CEO of PG&E, and John Rowe, CEO of Exelon, who implored legislators to institute mandatory carbon controls and cap-and-trade programs. Ignoring the switch to a low-carbon economy endangers utilities and causes a regulation risk of unknown proportions that most analysts aren't missing. Companies that rely on coal will face billions of dollars of stranded costs, Lubber said. "It's a bad investment for investors in those companies."

The institutional investor group represents one strongly-held view. Time will tell if its predictions bear out or whether their ideas were risky propositions.

 

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Gary M. Stern