Institutional Shift: Calling the inflection point, and other trends to watch in 2020

The keyword of the year in climate action: scale. Pension funds and other large asset owners are putting pressure on their asset and fund managers to get on board the low carbon economy in a big way.

“What’s materially different from the past is that almost everybody is realizing we have now hit inflection,” Equilibrium Capital’s Dave Chen says in the latest installment of ImpactAlpha’s podcast series, Institutional Shift.

That’s reflected in recent moves by Dutch pension fund APB, which pledged its €465 billion ($511 billion) portfolio will be carbon-neutral by 2050, as well as by British asset owners like the Brunel Pension Partnership and the Church of England, and U.S. climate leaders like the New York State Common Retirement Fund (see “Pension funds get tough on climate laggards).

Change at an institutional scale is the theme that runs through Chen’s list of trends to watch: 

Low-carbon infrastructure. Asset owners are looking for material, move-the-needle impact on the climate picture and greenhouse gases. “The key word is scaling, and the key asset class or strategy for making that move is through infrastructure,” Chen said. Electric charging, grid load balancing, distributed storage, water, even food and agriculture. “You’re going to see the demand from asset owners for big, blocky chunks of infrastructure that, by definition, are long-term assets, that can move the needle and scale.” Case in point: The $1 billion in financing raised this week by Generate Capital for “sustainable-infrastructure-as-a-service.” 

Corporate strategy shift. Corporate spending on climate mitigation and adaptation dwarfs private-equity and venture-capital investment by at least an order of magnitude. Corporations, with their massive R and D, product and marketing budgets, as well as global distribution, will be one of the biggest players in implementing large-scale climate action, he predicts (see, “Global corporations start to capitalize on ‘positive externalities’”). 

“Yes, there will be a whole lot more greenwashing, but you need to look below that to the companies that are deploying real meaningful products, technologies, integrations, that speak to where the market is going, and not just the positioning,” he says. “The low-carbon economy will become less of an aspiration and become a product category.”

Share the wealth. The ‘S’ has been the toughest nut to crack in ESG, or environmental, social and governance investing. Social protests in many cities last year brought the issue of inequality to the fore, while awareness is growing that sharing wealth more broadly is good not only for the economy as a whole, but for companies as well, in productivity, employee morale, and customer satisfaction. “The institutional asset owners are going to define S as social equality, equal access and social mobility and … start to ask these questions of their fund managers and how are they helping with that,” Chen said. “You’re going to start to see the institutional asset owners define S in a much more pointed way.”

Mergers and acquisitions. Companies of all stripes are buying their way into the future. Japan’s largest asset management firm, Nomura, bought the renewable energy investment bank Greentech in December. This week, the Australian financial services firm Perpetual Ltd. snapped up Trillium Asset Management, one of the first investment advisors to focus exclusively on ESG investing.

“We have heard from financial intermediaries that the phones are lighting up from asset owners asking for portfolios or assets mapping to the trends we are talking about,” Chen said. “You will see very active acquisitions taking place in large asset managers that give these large platforms substantive positions in the low-carbon economy or sustainable infrastructure. The writing is on the wall.”

Catalytic capital. Chen sees a segmentation in the marketplace, in which sustainable investing becomes mainstream and ‘impact investing’ is increasingly identified with catalytic capital that is able to take higher risks or lower returns in order to nurture new sectors and business models to maturity. “I do not consider catalytic to be a diminished role,” he said “It’s the courage to go where others won’t. There are only so many investors who have that courage and drive. And they will attach that courage not to IRR and home run hits, but to escort an idea long enough to see the light of day. “

All the buzz. A number of long-simmering investment themes will burst into prominence, Chen predicts. That happened last year with plastic; this is the year investment in waste-reduction, alternatives and cleanup get real. “It’s not just about straws,” Chen said. The carbon footprint of air travel will turn road warriors into pariahs, and make impact and environmental investors think twice about flying around the planet to talk about saving it. Soil carbon will become a thing; “Everybody wants to be a farmer,” Chen says (see, “Climate-positive beer takes regenerative agriculture mainstream”). Concern about the oceans will translate into practical financial vehicles and policies to restore the seas.

Such trend-spotting doesn’t require a crystal ball, just paying attention. Chen said much of Equilibrium’s strategy can be traced to McKinsey’s 2008 chart (updated in 2010) showing the cost curves of a range of emerging carbon-abatement technologies. 

“Everyone should take a look at it and say, ‘If I had been smart enough, I would have used that as an investment guide and I’d be worth a lot today’” Chen says. “Many of the things on that chart have come down their cost curves and are what people are talking about in terms of investable opportunities to move the needle.”

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