Suggested Citation:
Bachher, Jagdeep Singh and Amy Myers Jaffe (2016) Energy Investing and Climate Change: Recommendations for the Next U.S. President. Institute of Transportation Studies, University of California, Davis, Research Report UCD-ITS-RR-16-08

Energy has traditionally been a focus of real asset investing, designed to enhance returns and balance against market risk such as inflation. But disruptive technologies and mounting climate change risks are presenting new challenges for energy-related investing. Fossil fuel commodity prices are increasingly volatile, and institutional investors are becoming more cognizant of the urgency to rebalance their energy portfolio to reflect climate change risk and the long-range transition to cleaner energy sources. Many U.S. pension funds and university endowments are also facing pressure from stakeholders to play a more proactive role in fostering climate change mitigation. However, multiple investment barriers remain. One barrier to the deployment of pension and endowment capital is the poor track record early efforts in clean energy investing have produced. Investor commitments to cleantech early adopters via venture capital and private equity funds produced mixed results in the 2000s. To sustain the flow of billions of dollars from long-term institutional investors into energy, new, innovative financial platforms will be needed. That’s because the scale and scope of capital investment in energy infrastructure is very large, with long lead times to first earnings and a prolonged time scale for full returns. While institutional investors with patient capital could be the ideal source of finance for such long-lived asset investing, creative mechanisms are needed to overcome the hurdle of venture and technology risk. Regulatory uncertainty in the United States imposes an additional barrier to commitment of long-term capital.

Government has a role to play in promoting the regulatory and commercial conditions that allow energy cleantech developers to attract the needed capital to deploy new climate solutions. Additional financing structures and solutions are needed that can align direct opportunities in cleantech investing for long-term investors like pension funds, endowments and family offices with the long-term objectives of those institutions. What is needed is means to generate attractive risk-adjusted returns from investment in resource innovation companies and renewable energy projects in a manner that is vetted and verified by well-qualified parties.

For all these reasons, the next president should support the policies and improvements to existing oversight that enable the most successful financing mechanisms such as not-for-profit intermediaries, green bonds and tax-enabled off-balance-sheet-funding mechanisms.