Investing in the Green Economy

By Calvin Hennick

Responding to the risks posed by climate change is no longer reserved for socially responsible companies. There is now a clear priority for all businesses that want a prosperous future.

A car in the 1970s traveled, on average, fewer than 15 miles on a gallon of gasoline. Today, that number is pushing 35. Around a decade ago, solar power was still largely seen as a niche energy source, reserved for organizations that were either exceptionally enthusiastic about sustainability or the recipients of large subsidies. Today, utilities are leading investment in solar with a doubling of U.S. large-scale solar projects to about nine gigawatts in 2016, while suburbanites are topping their roofs with solar panels, slashing their energy bills and even sometimes selling some back to the grid.

A solar panel is produced at SolarWorld, America’s largest manufacturer of solar panels.

What changed? The marketplace.

Over time, gasoline became more expensive, and the cost of solar panels came down quite a bit. In fact, photovoltaic prices have fallen 26.5 percent for every doubling of cumulative installed capacity, according to the 2017 Sustainable Energy in America Factbook from Bloomberg New Energy Finance and the Business Council for Sustainable Energy. Also according to the report, the U.S. has added 76 gigawatts of renewable energy generating capacity in the past five years, improved energy productivity by 10 percent, and improved fuel economy by 12 percent. Over the same period, average retail electricity prices have fallen by 4 percent, and total gas production has jumped 12 percent. Also, renewable energy sources, together with natural gas, now meet half of U.S. power demand, up from 38 percent in 2011.

But the shifts toward more efficient cars and renewable energy didn’t happen on their own. While consumers have certainly become more concerned about gas mileage since the days when gasoline cost under a dollar per gallon, much of the increase in fuel efficiency was driven by federal standards. And while the cost of manufacturing and installing solar panels has dropped dramatically, the solar power industry has relied on subsidies for most of its existence to make it competitive with energy from fossil fuels.

Sue Reid, vice president of climate and energy programs at Ceres.

Sue Reid, vice president of climate and energy programs at Ceres.

Fuel efficiency and solar power both illustrate how green technologies can win out over less sustainable practices. Many of today’s vehicles are safer, offer more features, and run cleaner on less fuel. Many observers project that solar energy will be the dominant global power source in the coming decades.

But often, as these two instances show, green technologies need a little push before they’re ready to compete on equal footing with the status quo.

“You need a combination of policy and business action,” says Sue Reid, vice president of climate and energy programs at Ceres, a nonprofit organization that advocates for sustainability leadership.

Ceres was founded after the Exxon Valdez oil spill in 1989, with the idea of bringing environmentalists and capitalists together to help create a sustainable business model that would be good for both the environment and for large-scale business. During its nearly three decades of existence, Ceres has attempted to influence public policy around sustainability while working hand in hand with the business community to encourage sustainable practices. But at a time when aggressive federal action on key issues like climate change appears to be unlikely, Reid says, the role of businesses and investors in advancing the green economy is even more heightened.

“Businesses, even in this rather bleak landscape in terms of making progress at the federal level, are continuing to step up and say, ‘This is important,’” Reid says.

Reid highlights policies including climate and energy targets, cap-and-trade, or carbon taxes, as the next frontier of public policy. Each of these policies is attracting businesses but not yet achieving uniform private sector support, explains Reid. Until stakeholders work out their long-term interests in line with investors’ views, it will be difficult to push for these next generation policies.

Ceres works to help businesses see where sustainable practices can be a financial boon to them and also uses the clout of investors to help promote sustainability. The organization represents large investors—including some of the biggest public pension funds in North America—that combine to manage $14.5 trillion in assets. Whereas company executives face the pressures of quarterly earnings reports, long-term investors view their finances over decades, Reid explains. If climate change threatens water supplies for the companies in which investors have a stake, for example, then that can negatively affect portfolios decades down the road, long after today’s executives have retired.

“It’s the foundational principle that environmental and business interests shouldn’t be at odds,” Reid says. “Especially when you embrace a longer-term time horizon, business values go hand in hand with sustainability.”

Since Ceres was founded, a number of other organizations—including the U.S. Green Building Council (USGBC)—have been formed at the nexus of business and environmental concerns. Ceres is a member of the We Mean Business coalition, which includes organizations like BSR (which develops sustainable business strategies through consulting, research, and cross-sector collaboration) and the B Team (a nonprofit formed by global business leaders to spark “a better way of doing business” that promotes the well-being of the planet) among others.

In recent years, due in no small part to the work by Ceres and others, it has become de rigueur for corporations to describe their efforts to mitigate climate change in their corporate sustainability reports. But whether it is in the awareness gained from these practices, or the tangible effects of the warming climate, corporate attention to the business risks of climate change is palpable. And this attention is leading to a new level of business action.

Breakthrough Energy Coalition investors: Microsoft co-founder Bill Gates; Amazon founder Jeff Bezos; Jack Ma, executive chairman of Alibaba Group; and Facebook founder Mark Zuckerberg.

Breakthrough Energy Coalition investors: Microsoft co-founder Bill Gates; Amazon founder Jeff Bezos; Jack Ma, executive chairman of Alibaba Group; and Facebook founder Mark Zuckerberg.

Take the Low Carbon USA coalition. A project of Ceres and the World Wildlife Fund, the call for low carbon policy has attracted upwards of 1,000 businesses and organizations, including USGBC. Signatories include not only the climate progressive types, but notables such as Dupont, Monsanto, and power giant NRG Energy. The statement pledges commitment to addressing climate change and asks elected officials to support low carbon policies, including implementing the Paris Agreement, a good example of what Reid means by businesses embracing sustainability as a core business value.

For more evidence, consider the influence of global institutional investors, such as the U.S.’s CalPERS $275 billion pension fund, that prefer investing in green building projects. Indeed, more than 250 members of GRESB, the Amsterdam-based group that assesses the sustainability of real estate private equity funds and real estate investment trusts (REITs) worldwide, use the organization’s data in their investment management and engagement process to optimize the risk/return profile of their investments. Investor focus creates real results, with mega–real estate players such as TIAA-CREF, Tishman Speyer, and Hines actively working to calculate carbon footprints and improve their GRESB scores.

In late 2015, Microsoft co-founder and billionaire philanthropist Bill Gates announced the Breakthrough Energy Coalition, a global group of investors committed to developing new clean energy technologies. The group includes such business luminaries as Amazon founder Jeff Bezos, Virgin founder Richard Branson, Hewlett Packard Enterprise chief executive Meg Whitman, and Facebook founder Mark Zuckerberg.

This group is serious about investing in the clean energy future. This past December, the coalition announced the Breakthrough Energy Ventures fund, a pool of more than $1 billion to support companies and technologies that have the potential to reduce greenhouse gas emissions. In particular, the fund will target the electricity, transportation, agriculture, manufacturing, and architecture industries. Hallmarks of the fund, according to the coalition, will include patience, judgment by scientific milestones, flexible investment capabilities, and a significant global network.

“Our goal is to build companies that will help deliver the next generation of reliable, affordable, and emissions-free energy to the world,” Gates said in a statement when the fund was announced.

“When it comes to energy, people say you cannot make money, meet demand, and also benefit the environment,” Jack Ma, executive chairman of Alibaba Group and a board member of the coalition, said at the time. “But we can, and we will.”

Investment, business, and policy—all three are needed to reach the greenhouse gas emissions targets necessary for the aspirational 1.5 degree warming limit set forth in the Paris Agreement.