Environmental
Investing:
Debunking
the Myths
Asset owners often find common
cause in arguments against
employing environmental investing.
Here, ai5000 contributor Angelo A.
Calvello, Ph.D., attempts to debunk
such myths—and guide investors
toward a more prudent mindset.
leaves no doubt that policy is a major source of risk
and driver of return in environmental investing.
The three most common reasons I hear from asset
owners as to why they do not choose environmental
investments are:
It certainly is necessary to be mindful of expected
policy decisions when it comes to such investments
as carbon-oriented hedge funds or speculative
renewable energy projects that are dependent upon
the promise of government support for their internal
rate of return (IRR). However, there are innumer-
able environmental investment opportunities that
are not dependent on future climate policy.
consumers, who typically bear the cost of the tariff,
to lower tariffs because the IRRs of the projects
were too high. I would argue that this risk and other
related risks (e.g., site selection, project management) are not directly related to climate policy.
They cannot even be properly called sovereign risks
except by extension (i.e., consumers might be feeling
the consequences of a weak national economy and
demand lower energy prices).
tive technologies if we are to meet the environmental challenges before us, but not all environmental investments are based on technological
bets. Investors need to be aware that plenty of
viable investment opportunities exist whose success
does not depend on “picking a winner.”
1. “We’re waiting for climate policy to be settled
before we begin investing.”
2. “Environmental investing is really about picking
winners, and we’re not good at that.”
3. “We don’t do socially responsible investing.”
So, yes, policy matters, but environmental invest-
ments clearly exist that benefit from existing incen-
tives and regulations and do not depend on sweeping
climate regulation. Investors need to include these in
their broader opportunity set and rigorously vet each
on its own merits.
One example is a small environmental company
looking for additional funding whose business is
to destroy harmful ozone-depleting substances
(ODSs), such as HCFCs, CFS, and HALONs. The
company’s edge is not its ability to develop or
deploy a new disruptive destruction technology.
Quite the contrary is true: The company uses
a proven, well-established technology for this
purpose.
To those asset owners who utter these clichés, I say
it’s time for you to rethink your views.
For example, the IRRs of some current solar projects
in Europe, which are typically in the high single-digit to low double-digit range, certainly rely at least
in part on an existing governmental feed-in tariff.
The tariff requires regional or national grid utilities
to buy electricity at a guaranteed price per k Wh for
a fixed term (usually 15 to 25 years) from all eligible
participants.
“We’re waiting for climate policy to be settled
before we begin investing.”
“What one politician can mandate, another can
terminate—and therein lies one of the biggest risks
for clean energy.” This quote from The Economist
The tariffs are not contingent on any international
climate accord. There are clearly risks with such an
investment, the biggest being that the feed-in tariff
is reduced (as it has been recently for solar energy
in Germany), but this change is not the result of
a change in climate policy. Rather, it is a call from
“Environmental investing is really about picking
technology winners, and we’re just not in that
game.”
In environmental investing, picking winners
usually means picking those disruptive technologies that will come out of nowhere to help us mitigate or adapt to greenhouse gas emissions.
There is no question that we will need such disrup-
The company’s edge is its ability to create a supply
chain (with enough capacity to support its long-
term plans) that allows it to capture, aggregate,
transport, and destroy ODSs in a verifiable, cost-
efficient, and compliant manner. Doing so gener-
ates carbon offsets that it can sell in the global
carbon credit market (primarily because these
credits are so “clean”) for a price that exceeds their
cost of production. It is the company’s variant
perception rather than any technology that makes
