Understanding the climate investment universe – sectors, impacts and opportunities

Climate investing is evolving fast, but to make the most of the opportunities you need a clear view of the landscape. You need a map.

Working with climate-focussed investors gives me a broad view of where capital is being allocated, and in an effort to identify emerging opportunities beyond the horizon, I’ve set about mapping the climate investment universe.

It’s an effort to clarify my own thinking on what ‘climate investing’ really means, and I hope it helps investors and allocators to design portfolios that align quantifiable climate impacts with attractive financial returns, as well as building capacity to influence company management so they can embed climate impact as a value driver. 

It defines a core set of asset-class categories, and within each it explores the sectors, impact factors and investment firms that are working to reduce emissions and sequester carbon. They vary by risk profile and impact potential, but as a whole they offer a diversified mix of climate solutions that are hungry for aligned capital.

By understanding the opportunities and challenges associated with each asset class, I hope more investment managers recognise the potential of allocating capital through a climate lens. 

Climate change presents both an existential threat to humanity and a significant investment opportunity. It’s going to take some $9 trillion of annual spending to transition our economy to a low carbon future, which means investors have a crucial role to play in supporting climate-tech innovation and steering capital towards breakthrough industrial developments. 

This mapping exercise is the just the first step in developing a holistic climate investment playbook. In later articles I’ll narrow the focus to offer practical pathways for incorporating these climate considerations into investment analysis, setting climate targets, engaging with companies, as well as measuring impact and reporting on progress; so stay tuned. 

The climate investment universe – by asset class

This high-level ‘map’ is arranged by traditional asset class categories, but it also narrows the focus with titles like ‘Natural Capital’ and ‘Renewable Energy Infrastructure’ as distinct groups, highlighting their emergence as investible categories that are poised for growth. 

Each asset class is then broken down by:

• Sector
• Potential Impact
• Key Indicators
• Leading Investors 

Venture Capital 

VC investors support founding teams at the earliest stages of a company’s development. This increases both risk and potential return, but such proximity to the founding team can also help in communicating and steering climate outcomes. While tangible impact outcomes (and profitability) are likely still some way off, the onus is on the investment manager to assess and forecast future impact potential. 

Climate-tech has boomed in recent years to become a distinct early-stage category. Investors recognise the monumental shift that is underway in transitioning our economy away from fossil fuels, and they’re backing deep-tech innovators who are at the vanguard of the next industrial revolution. 

For a deeper dive, the HolonIQ offers a thorough taxonomy of the ‘Global Climate Landscape’. 

Sectors

Potential Impact

Key Indicators 

Leading Venture Capital Investors

Private Equity

Private Equity (PE) investing supports the transition of established companies to become climate leaders. It’s a powerful model; by applying a climate lens to the process of acquiring a controlling stake in a business that has strong growth potential, investors can drive value creation by implementing strategic changes, and operational improvements.

PE tends to sit lower on the risk curve than VC, but it has its own challenges. Investors need to have the managerial and operational resources to drive a major turnaround in an established business. 

Ironically, the biggest opportunities may lie in investing in big emitters in hard-to-abate sectors, as long as they have a viable transition pathway towards decarbonisation. This offers a lens for PE investors to identify opportunities, and this ‘transition’ approach offers asset owners an alternative to divesting from heavy emitters that are inflating their portfolio emissions numbers. Tideline offers an excellent overview on the ‘Grey-to-Green’ investment approach. 

Sectors

Potential Impact

Key Indicators

Leading Private Equity Investors

Renewable Energy Infrastructure

The boom in renewable energy projects over the past two decades has created a standalone infrastructure asset class. Grid-scale wind, solar and hydro projects are growing ever larger as governments and companies alike work to replace fossil fuel-powered energy with renewables. 

It represents a monumental industrial overhaul, and it’s just getting started. New sources of power will require major upgrades to the grid, but also a progressive approach to energy policy and management and updated foreign investment rules and incentives. And of course all of these decisions need to factor in the rise of Generative Ai and their power hungry data centres. 

But climate-friendly infrastructure isn’t just about energy, it includes everything from electric car charging stations and high-speed trains to green buildings that save energy and water, recycling plants, circular economy solutions, and even the digital tools that make our energy systems smarter. 

Climate investors are recognising the potential to make our existing infrastructure greener and more resilient. Everything is connected, you can combine a solar farm with a battery storage system and a smart grid. Or, sustainable transportation with EV chargers, public transport, and bike lanes.

Sectors

Potential Impact

Key Indicators

Leading Private Equity Investors

Natural Capital

There’s debate about whether ‘natural capital’ is a standalone asset class, but what’s certain is that it includes everything that’s vital to life on earth. Natural capital is the planet’s stock of natural resources and ecosystem services, it’s the air we breathe and the water we drink, as well as the oceans, forests, soil and animals.

The large majority of companies in the world have some kind of dependence on nature, which makes it a key risk factor for investors. It’s hugely complex, but the loss of nature and biodiversity could actually present an even greater threat to our economy than climate change. This creates a dangerous feedback loop in which ecosystem degradation reduces carbon sequestration, accelerating climate change, which in turn intensifies biodiversity loss.

Investing in nature and biodiversity shows the true breadth of climate investing. It broadens the conversation from just talking about reducing GHG emissions, to exploring the problem at a planetary scale. It brings agriculture into the conversation, it recognises the sequestration power of forests, and forces us to quantify the economic value of protecting our oceans, rivers and wetlands. 

Sectors

Potential Impact

Key Indicators

Leading Natural Capital Investors

Green and Sustainable Bonds (Fixed Income)

Companies, governments and development banks issue bonds to raise capital and fund a broad range of projects and developments. Bonds are designed to offer reliable access to capital with favorable interest rates and tax treatment, and they don’t dilute shareholders. 

Green and Sustainable Bonds are types of ‘labeled bonds’, which means proceeds must be used exclusively for projects and developments that fit within a defined environmental or sustainability criteria. For climate investors this is a compelling option that offers exposure to a low risk asset, with verifiable impact outcomes. 

Green bonds focus solely on environmental outcomes, with projects including: renewable energy, sustainability upgrades to facilities, water management and conservation.

Sustainable Bonds involve a broader scope for use of proceeds to cover both environmental and social issues. This offers issuers more flexibility, but it also complicates impact measurement and disclosure processes. 

An additional category to consider are Sustainability Linked Bonds (SLB). These bonds don’t define a specific use of proceeds requirement on the issuer, but instead, they reward issuers with lower interest rates if they achieve certain organisational sustainability hurdles. This means climate investors must assess the credibility of the issuer in terms of their broad organisational approach to climate, decarbonisation and sustainability. 

Sectors

Potential Impact

Impact Indicators

Leading Fixed Income Investors

Public Equities

Public markets are huge, they’re accessible to a wide range of investors and offer liquidity and transparency. This size and accessibility means climate investors can drive impact and reduce climate risk across a number of dimensions. 

At a basic level, they can tilt portfolios towards large companies in incumbent industries that are, at least, measuring their ESG risks, and at best, leading the way in the clean energy transition. Measurable outcomes may be limited here, but the incremental improvement in sustainability performance is important. 

With a more determined impact lens, investors can go deeper to identify listed companies with products or services that are delivering measurable decarbonisation or nature-positive outcomes. This signals demand to companies that investors value positive sustainability outcomes, and it further embeds emissions data as a primary indicator of value creation. 

Climate investors will most often endeavour to push investee companies to go further, to embed sustainability improvements as a value driver, but influencing public companies can be more challenging than private companies. The levers for change they do have are: voting in AGM’s, proposing shareholder resolutions, and if they’re large enough, they engaging directly with a company. 

Data access is another challenge, but progress has been made with the launch of global climate reporting standards like ISSB, and ASRS is Australia. It’s important to note that these standards look only at financially material issues (single materiality), which means they assess only the impacts of sustainability factors on the company itself. 

Climate investors will benefit from a focus on double materiality, where they assess both financially material factors, as well as the external impacts of a company’s products and operations on the environment and society.  

Sectors

Potential Impact

Key Indicators

Leading Public Equity Investors