From a dorm room at Stanford University, two business school students designed a system of solar panels for the roof of a boarding school in Nairobi. It worked. The school saved money and replaced the diesel generator it had relied on when the power went off.
“We put our headphones on, and we’d code all day,” Hopper said.
In 2013, the pair launched Aurora Solar, a software firm that speeds up design, permitting and installation for rooftop solar arrays. Today, a climate business that began in the dorms at Palo Alto has designed panels for more than 4 million solar projects, its revenue has soared tenfold, and it boasts 100 employees and expects to double that.
The secret to their success? Climate financiers.
For years, big renewable energy projects have found it relatively easy to raise money. Many investors have been attracted to the glitz of Tesla, the steel turbines in windmills or the fields of photovoltaic panels.
But now, as the cost of renewable energy plummets and awareness of the magnitude of climate change grows, market forces are luring investors into all sorts of “green” finance, nearly doubling the size of green bonds and green equity funds. These investors are looking up and down supply chains and searching not only for established companies, but also for innovative ones at early stages of development.
Energize Ventures, a climate change oriented venture capital firm, had been tracking Aurora Solar’s progress and pumped in two rounds of funding to fuel its rapid expansion — the first for $20 million and, in November, another for $50 million. The money came from Energize Ventures, whose investors include mainstream companies such as General Electric, Caterpillar and a big Canadian pension fund with a renewable energy mandate.
“Every single asset manager is looking to get away from carbon projects,” said John Tough, managing partner of Energize Ventures. His firm, by contrast, has invested in software that detects anomalies or breaks in the system so utilities don’t have to comb through 2 million drone photographs of turbines or solar panels to identify a problem. And with more than 500 drone pilots working for each of three large American utilities, Energize Ventures also has invested in software for drones, Tough said.
The surge in climate financing comes at a key moment, with President Biden promising to commit $2 trillion of climate-related spending over the next four years. As difficult as it will be to secure those staggering sums, Biden’s plan still will provide only a small part of the investment needed to slow climate change.
The International Energy Agency estimates that global investment in low-carbon energy will have to increase 2½ times by 2030 from its current level of about $620 billion a year to meet targets in the Paris climate agreement.
Private capital is essential to meet those targets, and the money has started to flow.
Despite the economic woes brought on by the pandemic, financial firms issued a record $357.5 billion of green and sustainable bonds in the first nine months of 2020, up 96 percent from the same period in 2019, according to Refinitiv, a consulting firm. The proceeds from the sale of the bonds are earmarked for projects related to climate change.
“Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself,” BlackRock chief executive Larry Fink predicted Tuesday in his annual open letter. Fink said that while he expected the covid-19 crisis to “divert attention from climate,” in fact, “just the opposite took place, and the reallocation of capital accelerated even faster than I anticipated.”
From January through November 2020, investors in mutual funds and exchange traded funds invested $8 billion globally in sustainable assets, a 96 percent increase over the sum for all of 2019, Fink said. “We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”
Big banks are scrambling to get in on it. HSBC maintains the top spot in underwriting green bonds, at 6.3 percent in the first nine months of 2020.
Goldman Sachs a year ago said it would devote $750 billion to clean-energy financing over the next decade, having already invested or financed $115 billion since 2006. And Henry Paulson, a former Goldman chief executive and U.S. treasury secretary, will become executive chairman of a new multibillion-dollar investment fund at the investment firm TPG devoted exclusively to combating climate change.
Many people are urging Biden to ask Congress for money to start green banks that could unlock even more private capital. (Supporters often call these institutions “accelerators” to make them more appealing to lawmakers.)
“It’s not that private banks have never heard of solar or electric vehicles,” said Jeffrey Schub, executive director of the Coalition for Green Capital. “It’s just that the speed of that private investment is far too slow.”
Another force in the financial world: the pension funds and money managers who want to woo individual customers who are alert to the threat of climate change. On Jan. 24, two of New York City’s big pension funds said they would divest themselves of $4 billion of fossil fuel stocks.
“No issue ranks higher than climate change on our clients’ lists of priorities,” said Fink, whose firm has more than $7 trillion under management. “They ask us about it nearly every day.”
He said that “not long ago, building a climate-aware portfolio was a painstaking process, available only to the largest investors. But the creation of sustainable index investments has enabled a massive acceleration of capital towards companies better prepared to address climate risk.”
“What’s even more encouraging is that the drivers [of the surge in climate finance] are the real economy,” not just investors, said Daniel Klier, the global head of sustainable finance at HSBC.
That means not only small start-ups like Aurora Solar, but also large companies like the cement and concrete maker LafargeHolcim, which in November floated an 850 million euro bond (just over $1 trillion) linked to cutting about half of its carbon dioxide emissions by 2030. If LafargeHolcim fails, the bondholders get higher interest payments in 2031. The concrete industry is one of the most greenhouse gas intensive in the world.
And Etihad Airways, a flagship airline of the United Arab Emirates, last October sold a $600 million five-year Islamic bond — which does not offer conventional interest in keeping with Islamic law — to help decarbonize its fleet and purchase carbon offsets. The loan carries penalties if the airline fails to meet its targets.
Big institutional investors also are jumping in.
In March, Prudential Financial became the first insurer to raise money with a green bond offering. It launched a $500 million bond issue devoted to investments that provide environmental benefits, including reduced greenhouse gas emissions and improved resource efficiency.
The realm of climate finance does have its own controversies. PepsiCo, for example, issued a $1 billion green bond, much of which went to buying recycled plastic. Many investors said that PepsiCo would have had to buy that recycled plastic anyway and that Pepsi was engaged in greenwashing. The bond offering was excluded from some green bond indexes.
The company, in a green bond annual report, countered that “by displacing virgin plastic with recycled plastic, PepsiCo can help to reduce plastic waste while lowering our dependency on non-renewable fossil resources and boosting the carbon and resource efficiency of our packaging.” It said it was lowering greenhouse gas emissions and saving energy.
Many investors also have steered away from financing green buildings at airports, asserting that they only lure passengers to planes that spew greenhouse gases.
Some of the biggest green financing still goes toward helping to construct traditional renewable energy, which is desperately needed. Renewables, including hydropower, provide just 17 percent of the energy used by the U.S. electricity grid and nuclear an additional 20 percent. The nation needs more if it is to eliminate the grid’s reliance on oil, coal and natural gas, which provide 62 percent of its energy.
In April, as coronavirus cases started spreading across the country, a company called Invenergy put the finishing touches on its 100th sustainable energy project, a field of solar panels just outside the town of Camilla in southwest Georgia. Local per capita income is less than half the national average, so the investment and the new tax revenue were welcome there. Under a 30-year contract, Invenergy will sell all of the energy to the state utility, Georgia Power.
A handful of the big oil and natural gas companies, such as BP and Total, whose capital investment budgets dwarf those of most companies, are increasing their investments in solar and wind. Enel, a major Italian pipeline company, has an American green power arm that has invested in 67 renewable projects in 18 states with 5.7 gigawatts of installed energy capacity. Enel X, the Italian utility’s energy services business, has been combining solar with small, dispersed battery storage in case of emergency, said Giovanni Bertolino, the head of e-mobility at Enel X North America. One of its battery storage installations serves the Marcus Garvey Apartments in the Brownsville neighborhood of Brooklyn.
Some investors are so eager to back climate-related projects that they will invest in public companies that resemble empty shells; they do not have any businesses to start with but are looking for ventures to buy. The investments are the equivalent of blank checks written to experienced energy executives who will try to find and jump-start promising energy firms.
David Crane, a former chief executive of the utility NRG, is leading Climate Real Impact Solutions (CRIS). Unlike most private-equity firms, which tend to invest in anywhere from 10 to 30 firms, each public company run by people like Crane will choose just one promising enterprise.
“It’s a mechanism that allows rising companies access to attractive capital earlier,” Crane said in October.
But it’s a riskier business. Crane said he was assessing companies on the basis of earnings projections for 2027. Some companies cannot even deliver their products at a meaningful scale until 2023, and some do not have any revenue yet, he said.
On Jan. 22, CRIS made its first move, buying a share of a high-speed electric charging company, EVgo. At any EVgo location, motorists should be able to recharge up to 80 percent of their batteries in just half an hour, enough for shoppers or people pausing at highway rest stops. CRIS provided $230 million, and after adding other financing, EVgo received $575 million in cash to expand from its current 1,600 chargers at 800 locations.
EVgo also has had talks with big automobile companies, which want a bigger electric recharging infrastructure before agreeing to Biden’s urgings to produce and sell more electric vehicles.
“What we’re seeing is that the market has the appetite to accelerate the clean-energy revolution,” said Cathy Zoi, the chief executive of EVgo. A Clinton White House and Obama Energy Department official who has spent years in the private sector, Zoi said, “The imperative is to go faster.”