Impact investing generally refers to investments made with the intention of generating measurable social and environmental impact alongside a financial return. When treated as a new asset class, clean energy + impact investing could generate synergies and growth potential for investors.
How Is This Research Useful to Practitioners?
The author examines clean energy + impact investing (CEII) and focuses on the impact investing industry. There is an ongoing debate over whether impact investing should be classified as an investment approach, investment style, or asset class. The author supports the view that CEII is a new asset class that could significantly contribute to the sustainable objectives of investors in search of economic, social, and environmental outcomes, as well as those of energy stakeholders.
Clean energy can help mitigate the effects of climate change. Global warming can potentially cause important financial asset losses arising from either destruction or lower earnings. The author identifies various synergies between clean energy and impact investing. The main economic synergies include portfolio diversification, portfolio performance improvement, and portfolio risk mitigation. In addition, clean energy investments often have a low correlation with other asset classes. CEII could result in financial returns that exceed those of traditional investments, and it can encourage investments in climate change risk mitigation.
As an asset class, CEII may facilitate better portfolio diversification, has a potentially improved portfolio return, and could serve as a risk mitigation technique.
How Did the Author Conduct This Research?
The most-used definition of impact investing is “investments made with the intention of generating measurable social and environmental impact alongside a financial return.” The focus is on triple-bottom-line outcomes—that is, those that affect people, the planet, and profit. Global impact investments are estimated at around $77 billion at the end of 2016, which is negligible as a proportion of global financial assets. Nonetheless, the industry is expected to grow significantly in size, and this growth is expected to increase rapidly once impact investing is better recognized as an asset class.
Clean energy, which includes such technologies as solar power, wind power, electric vehicles, LED lighting, and sustainable infrastructure, could also be an important catalyst to advance impact investing. According to the International Energy Agency, clean energy is crucial for mitigating climate change and keeping it under the two-degree Celsius threshold required for the planet to escape the most dangerous effects of climate change. Furthermore, unchecked global warming can result in significant losses of financial assets (estimated between $2.5 trillion and $24 trillion). Addressing the clean energy and global warming challenges on a timely basis could result in clean energy investments doubling, to $2 trillion per year, over the next 36 years. Clean energy infrastructure development also improves the attractiveness of infrastructure investments by mitigating climate risks and reducing emissions.
The author proposes CEII be treated as a new investment class given the numerous synergies—economic, environmental, energy, and social—between clean energy and impact investing. Clean energy investments can serve as a climate hedge to balance carbon-related risks within impact investors’ portfolios. CEII will require additional research before it can take off as a new asset class.
There seems to be merit in treating CEII as a new asset class. It is interesting to note that impact investors can obtain higher returns than traditional funds at times. Climate change needs to be promptly addressed, and investment in clean energy can help mitigate the adverse effects.
Finding and evaluating CEII investment products and intermediaries is not always easy. The track record of some product providers is not strong, and some caution is warranted. More clarity on performance measurement, as well as guidelines from the regulators, is needed. Additional investigation into CEII as it develops around the world should be the object of future research. Investors who ignore CEII as a new asset class are likely to do so at their own peril.