Whether or not one fully agrees that we only have 12 years to limit a climate change catastrophe, as per the latest report from the UN Intergovernmental Panel on Climate Change (IPCC), there is an undeniable need to clean up our environment.
The rising number of hurricanes, floods, droughts and wildfires – vividly covered by the media — are increasing the awareness that things are not as they should be.
Globally, investors are ready and willing to positively impact climate change by investing in clean energy. According to the latest figures from Bloomberg New Energy Finance (BNEF), which produces primary research on clean energy and has been tracking investment in the sector for over 10 years, $67.8 billion was invested in this year’s third quarter alone.
The total amount invested in 2017 was $333.5 billion and BNEF expect the final figure for 2018 to be similar. However, the IPCC says $2.4 trillion a year needs to be invested to keep global warming to a maximum of 1.5 degrees centigrade.
Often, how we define and measure things have a significant influence on how we react to them – and in the world of energy it can influence how much, and where, investors invest.
When it comes to definitions, to classify an energy project as clean and green, it also must be renewable. This means that the conversion of coal to so-called clean coal does not qualify, and our investors are not keen on clean coal as evidenced by the fact that in the US and Europe finance for clean coal projects is scarce. Not only are such projects costly – approximately 40% of the cost of regular coal plants – they are also complex, and still result in carbon dioxide emissions, though about 25% to 35% less. But, carbon emission decrease is not a metric that impact investors consider when investing in energy.
Measurements are a further issue, as to date, outputs, such as how many gigawatts of renewable power were commissioned annually, is largely measured. This is not helpful to impact investors who need to understand the actual impact of their investments on their intended beneficiaries, and not only its outputs.
The Global Impact Investing Network (GINN), a global champion of impact investors worldwide, has produced a catalogue of metrics for a wide range of impact investing sectors. While there is no specific metric for the impact of green energy among its environmental metrics, it does have a few standards that could be applied to clean energy. For example, energy metrics that include numbers of new individuals and the numbers of new households receiving electricity as the result of a project could be applied to energy generated from clean sources.
In addition, the Impact Management Project has brought together over 2,000 enterprises, investors and practitioners to build consensus on how impact is talked about, managed and measured. They have developed five dimensions for measuring the impact of a particular initiative. These are:
- ‘What’ is about what outcomes the enterprise is contributing to and how important the outcomes are to stakeholders;
- ‘Who’ tells investors which stakeholders are experiencing the outcome and how underserved they were prior to the enterprise’s effect;
- ‘How Much’ tells investors how many stakeholders experienced the outcome, what degree of change they experienced, and how long they experienced the outcome for;
- ‘Contribution’ tells investors whether an enterprise’s and/or investor’s efforts resulted in outcomes that were likely better than what would have occurred otherwise; and
- ‘Risk’ tells investors the likelihood that that impact will be different than expected.
The International Finance Corporation, part of the World Bank Group, has also recently released a draft set of principles for impact management.
This shows that while there are impact standards and principles that could be applied to clean energy, so far there is not an agreed set of impact standards, meaning that investors still need to work through and establish their own. This makes it more difficult to motivate for and track the impact of their investments. As the world is so desperately in need of clean energy projects, a simple set of standards would surely help to direct more capital towards them.
About the author
With over 14 years’ experience, Heleen heads up the RisCura team who provides unlisted investment services for clients across all alternative asset classes such as Private Equity, Infrastructure and Private Debt. In this role, she provides assurance and advice to investors in alternative assets and alternative asset funds including independent valuation, financial modelling, risk and performance reporting and research.
This ensures that institutional investors receive accurate reporting and assessment of returns on investments, which in turn allows them to manage their investments more effectively. She joined RisCura in 2012 and has performed and reviewed over 150 valuations since then. She previously worked as a corporate finance partner at PKF Inc.