Tackling climate change is key impact priority

Impact investing can mean many different things to different asset owners, depending on their investment priorities. For the nearly 4,000 global signatories to the Principles for Responsible Investment, the United Nations-supported organization representing more than half of the world's institutionally managed assets, the No. 1 issue is climate change, said PRI CEO Fiona Reynolds.

"They see both risk and opportunity," said Ms. Reynolds, who is based in London.

It is a common refrain from asset owners, managers and consultants.

"For those pension clients seeking thematic investing, their focus has tended to be around climate solutions like renewables, water access or sustainable agriculture,'' said KC Connors, partner and philanthropic practice director at NEPC LLC, St. Paul, Minn. "Public pension plans are exploring climate engagement as a theme and working to understand changing risk factors like weather and food supply chains and the related possible opportunities. If pension behavior mirrors what we have seen in the philanthropic sectors, we anticipate an increase in investments over the next few years."

A dramatic example of investor engagement on climate came in late May, when Exxon Mobil Corp. shareholders, backed by the three largest U.S. pension funds — the $463.9 billion California Public Employees' Retirement System, Sacramento, the $299.8 billion California State Teachers' Retirement System, West Sacramento, and the $254.8 billion New York State Common Retirement Fund, Albany — voted in three board candidates with experience in energy transition.

Investments in energy transition investments range from renewable energy sources like solar and wind to battery storage, hydrogen-powered electric vehicles and charging stations, and show up in various asset classes, including venture capital, growth equity and infrastructure. A recent Preqin report predicted that unlisted natural resources assets under management including investments related to energy transition could see double-digit growth by 2025.

"What resonates the most with us (is) investing in assets or business that facilitate the transition to a net-zero economy," said Connor Teskey, Toronto-based managing partner at Brookfield Asset Management who heads the firm's renewable power group and is CEO of Brookfield Renewable Partners. "Due to investor demand around the world, we think there is massive investment opportunity for returns."

He also sees a new asset class: transition investing. "What is become increasingly accepted is that simply investing in what is already clean and green is not going to solve the crisis," said Mr. Teskey. "We are entering early innings of what is going to be a multidecade growth in the market. We're quite excited."

While low-carbon investment is a timely opportunity, "we also recognize that you can't just tackle climate in a vacuum," said Nicholas Abel, investment officer at CalSTRS who co-manages the pension fund's sustainable investment and stewardship strategy.

With a goal of putting nearly $2 billion to work over the next few years, CalSTRS is looking to place $200 million to $500 million in affordable housing this year, $150 million in low-carbon private equity co-investments per year and up to $500 million in new low-carbon opportunities like reforestation, he said.

Amit Bouri, co-founder and CEO of the Global Impact Investing Network, New York, expects that November's U.N. Climate Change Conference, known as COP26, "will lead to much greater interest" in climate solutions and investment opportunities, but he does not think climate will crowd out other investments.

"Investors who often start with one thing often move on to a broader portfolio. Everyone starts somewhere," Mr. Bouri said.

Economic and racial inequalities highlighted by the global pandemic are gaining on climate change when it comes to attracting investors, and "efforts to address both are not mutually exclusive," Patricia Espinosa, U.N. climate change executive secretary, said in a recent speech. "If done right, the recovery from the COVID-19 crisis can steer us to a more inclusive and sustainable climate path."

Nick Moon, a partner at the $2 billion impact investing fund manager LeapFrog Investments in Edinburgh, Scotland, said that many limited partners have increased allocations or inflows into impact strategies over the past 12 months, and "it appears that for several impact themes, including climate, financial inclusion and health care, the pandemic has accelerated capital flows and investor client sentiment."

To Warren Valdmanis, a partner at Two Sigma Impact in Portland, Maine, focused on workforce issues, "one potential silver lining in this big "C" (COVID) dislocation is the S in ESG is finally getting noticed. Because it is so challenging to measure, S has long been the forgotten letter in ESG. The world is moving in this direction whether you like it or don't like it. Companies that are on the front foot of things like workforce, that's going to be a more valuable company and our belief is that investors will get rewarded," Mr. Valdmanis said.

Casey C. Clark, managing director and global head of ESG investments and portfolio manager at Rockefeller Asset Management in New York, said that while there are more strategies for climate solutions, diversity and inclusion "is material for every industry. They are the top two themes that we hear about," and every engagement letter asks companies to talk about it, he said.

Berenice Lasfargues, Sustainable Development Goals lead for BNP Paribas Asset Management in New York, with $575 billion assets under management, said a recent wealth management client survey showed "overwhelming interest" in SDG-13, climate action, "but there is definitely a wide range of interests, including a noticeable rise in social impact investing opportunities."

The 17 U.N. sustainable development goals endorsed by nearly 200 member countries to address big problems like inequality, climate change, health care and education , she said, "is the closest thing Earth has to a strategy."