Impact themes in focus: Climate

Investor appetite for climate-orientated solutions is growing as a political push for action accelerates momentum.

In April, TPG closed its inaugural climate fund on $7.3 billion, highlighting the volume of capital that is being mobilised for climate solutions in private markets. TPG Rise Climate adds a climate-specific strategy to TPG’s global impact investing platform, TPG Rise, and will bring a growth equity approach to supporting a wide range of commercially viable climate technologies to achieve scale. 

Jonathan Garfinkel, partner at TPG Rise Climate, says: “What happened two or three years ago was we were seeing an increasing number of deal opportunities that were climate-oriented, and those had bigger capital requirements on average than the impact investments we had historically made in areas like financial inclusion, healthcare and technology-oriented impact. Energy transition is often about building big infrastructure and there is a big capital stock that needs to be rebuilt, so that scale was one of the main drivers for us to raise a dedicated pool of capital.”

He says investors were keen to get on board. “Even though we were showing up with a first-of-its-kind fund, investors were really receptive and prepared to figure out how to fit the fund into their programmes,” says Garfinkel. “We were met with terrific demand from many of the world’s most sophisticated institutional investors and leading multinational corporates, who recognised this as something every company on the planet and every individual on the planet is going to have to focus on, which creates an extraordinary investment opportunity and an extraordinary impact opportunity.”

Impact funds with a broader mandate are also seeing a growing appetite for climate opportunities from investors. EQT is currently raising an impact-driven fund with a €4 billion target that will focus on mature companies with market-shaping impact potential within the themes of both climate and nature, and health and wellbeing. Its first two investments, in disease-resistant fruit genetics business IFG-SNFL and pest control firm Anticimex, show the opportunities available in the climate and nature space, says EQT’s head of sustainability for private capital, Sophie Walker.

“This is the investment opportunity of a generation,” she says. “We are already witnessing a pretty significant effort to transform to a low-carbon economy and that effort is only going to gather pace.”

Much of this increased activity will be driven by regulation “in both the US and the EU”, says Walker, suggesting that this should “unlock big opportunities by giving the market the certainty to be able to hunker down and really focus on some of the harder-to-reach climate and nature investment opportunities. For me, the next year looks pretty positive despite the economic challenges and inflationary pressures.”

Walker is also optimistic about the longer-term outlook for climate investing: “There are a huge number of really brilliant investment minds now focusing on unlocking these opportunities and that gives me great comfort about the years ahead.”

In the US, the Biden administration is pushing for more investment behind net zero through its Inflation Reduction Act, which will invest $369 billion in climate solutions and is the most aggressive climate investment action ever taken by Congress. Meanwhile, the REPowerEU plan from the European Commission seeks to diversify the region’s energy supplies and accelerate the clean energy transition. Such initiatives could represent a sea change for climate-focused investing.

“The opportunity set today is incredibly broad, and growing,” says Garfinkel. “The dynamics that are happening in the US in real time, with the passage of the Inflation Reduction Act, signify a landmark moment that is going to dramatically accelerate the evolution and adoption of many innovations for this new climate-oriented world. I think we will see accelerated activity this year and going into next year as that bill gets digested in the US.”

A global opportunity

Adrien-Paul Lambillon is a member of the ESG and sustainability team at Partners Group, which launched its PG LIFE impact-at-scale investment strategy in 2018 with a focus on the UN Sustainable Development Goals. He says the investment opportunity is global: “Generally, Europe is more advanced in terms of sustainability and energy transition, and it is higher on the political agenda, but it is also a more crowded market. 

“The Biden administration is pushing for more investment in the US – which is historically an underserved market in this – so there will be more opportunities there as well. This is not a regional play – we have invested globally in these opportunities and will continue to do so.”

At the same time, investors are becoming much more sophisticated in their understanding of climate investing, adds Lambillon. “Often renewable energy is the first type of investment for an LP, but now, as the level of sophistication in sustainability increases – and because the market for renewable energy generation assets is more mature, where it is sometimes difficult to achieve the returns these investors expect – they are going beyond those clean energy investments into other areas of decarbonisation.” 

Partners Group summarises the climate investment opportunity as falling into three buckets: replacement, conservation and carbon management. “Replacement is about clean power and low carbon fuels, while conservation is about reducing emissions by improving processes and enhancing energy and resource efficiency,” Lambillon says. “Then, carbon management is about the capture, transportation and sequestration of carbon emissions, because decarbonisation alone won’t solve the problem. We also need to remove CO2 from the atmosphere using new technologies like direct air capture.”

Partners Group portfolio company Climeworks is a good example of a company that designs, develops and operates carbon dioxide direct air capture plants, selling carbon dioxide removal services to both businesses and individuals.

Despite the scale of the opportunity, investing behind climate impact is not without its challenges, says EQT’s Walker: “The exponential pace of change is both a massive positive and a challenge, in terms of keeping up with new market practice, new regulation and even new language as things evolve so quickly. The Inflation Reduction Act is a great example of how quickly things can change.”

As politicians get on board, investors are also lining up to back the cause.