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Gates Leads Big Investors and UC in New Climate Effort

The Breakthrough coalition, which will invest in new energy technologies, is part of a wave of investors taking action on climate change.

  • Imogen Rose-Smith

As heads of state from around the world descended on the City of Light for the 21st United Nations Climate Conference late last month, a group of big investors announced they would do their part to build a greener future. Led by Microsoft co-founder Bill Gates, the group, comprising 28 deep-pocketed individuals and the University of California, pledged to invest more than $2 billion over the next five years in new energy technologies.

The group plans to develop a new venture capital investment fund and work with scientists at the University of California and elsewhere to invest in early-stage companies and support the research and development necessary to spur technological change.

The $91 billion University of California Board of Regents investment office wasn’t the only U.S. institutional investor to take a climate stand during the global negotiations. On December 4 New York State comptroller Thomas DiNapoli announced during a panel discussion in Paris that the $185.4 billion New York State Common Retirement Fund had committed $2 billion to a new carbon-tracking index fund. Meanwhile, Mark Carney, governor of the Bank of England, called upon former New York mayor Michael Bloomberg to lead a new task force to develop consistent, voluntary standards for corporate disclosures of climate risks.

These groundbreaking announcements show just how seriously investors and business leaders are starting to take the issue of climate change. After 13 days of negotiations, the 195 nations involved in the Paris conference, known as COP21, agreed to voluntary emissions standards designed to limit the increase in global warming to 2 degrees Celsius (3.6 degrees Fahrenheit). Though criticized by some for lacking enforcement mechanisms, the Paris talks did demonstrate a serious commitment to developing clean energy sources.

In a research paper published shorty before the talks, analysts at Goldman Sachs Group estimated the global market for low carbon technologies at $602 billion a year, with the most opportunity in solar, onshore wind, hybrid and electric vehicles and light-emitting diode, or LED, lights.

Called the Breakthrough Energy Coalition, the members of the Gates group are seeking to push newer and emerging solutions. The investors include venture capital veteran Vinod Khosla, founder of Khosla Ventures; Mukesh Ambani, chairman of India’s Reliance Industries; Prince Alwaleed bin Talal, the Saudi investor and chairman of Kingdom Holding Co.; Amazon founder Jeffrey Bezos; Richard Branson, founder of the U.K.’s Virgin Group; Aliko Dangote, founder and CEO of Nigerian conglomerate Dangote Group; John Doerr, general partner with the venture capital firm Kleiner Perkins Caufield & Byers; Jack Ma, founder and executive chairman of China’s Alibaba Group; and Facebook founder and CEO Mark Zuckerberg and his wife, Priscilla Chan.

Breakthrough members have pledged to work together and in conjunction with other public and private partners. “It’s pretty amazing that in the last few decades energy R&D costs have not gone up that much, and venture-type investing has not gone up [in green technology],”Gates tells Institutional Investor. Breakthrough aims to change the status quo of green tech by seeking a broad range of investment opportunities. “Ideally, we’ll bring in other investors, and we will have the resources to get behind literally up to 100 different ideas,” he adds.

Hedge fund managers are well represented in the coalition. They include Raymond Dalio, founder of $169 billion Westport, Connecticut–based firm Bridgewater Associates; Julian Roberson Jr. of Tiger Asset Management in New York; macro trader and philanthropist George Soros; and Christopher Hohn, founder of London-based hedge fund firm The Children’s Investment Fund.

John Arnold and Thomas Steyer are two ex–hedge fund managers who have joined the Gates effort. Now co-chair of the Laura and John Arnold Foundation, Arnold made his fortune as a natural gas trader with the defunct energy company Enron Corp. before launching his own hedge fund, which he closed in 2012. Steyer, founder of the San Francisco–based hedge fund firm Farallon Capital Management, quit finance in 2013 to devote himself full time to environmental activism. One a Bay Area–based investor-turned-activist and the other an energy-trader-turned-Texas-philanthropist, Steyer and Arnold come from very different backgrounds, but they agree on this common cause. “There is no greater challenge society faces than creating affordable clean energy innovations,” says Arnold in a statement. “However, private industry, government and philanthropy are unlikely to succeed alone. The Breakthrough Energy Coalition recognizes that one sector’s investments can complement another and lead to new technologies.”

Jagdeep Singh Bachher, CIO of the Regents of the University of California, says the public university’s endowment was introduced to the investment group by another Breakthrough member, Ratan Tata. Chairman emeritus of the Indian conglomerate Tata Sons, Tata is a senior adviser to UC’s investment office, offering guidance on international policy and global investment opportunities, especially in Asia.

Gates says the CIO’s office will help advise the new VC fund, serving as a resource for ideas and investment opportunities. It will also be an investor, having already pledged to commit $1 billion to green energy, and it will seek to bring other endowments and institutional asset owners into the group.

Green tech venture investing remains at the far end of the risk curve for many institutional asset owners — Bachher has said UC will likely invest later in the development process than some of the individuals in the group. But institutional investors are increasingly concerned about the risk of carbon to their investment portfolios. The $2 billion index investment by the New York State pension plan that DiNapoli announced during COP21 is designed to address the risk of so-called stranded assets: energy reserves that are unlikely to be used.

The Carbon Tracker initiative, a project of the London-based not-for-profit Investor Watch, has estimated that the fossil fuel reserves held by the largest 100 listed coal companies and the largest 100 listed oil and gas companies are greater than the amount that can safely be burned without pushing up global temperatures by more than 2 degrees Celsius.

For New York Common, Goldman Sachs Asset Management worked with CDP (formerly known as the Carbon Disclosure Project), a U.K.-based nonprofit that also tracks carbon emissions, to develop a fund that monitors the emissions of companies in the Russell 1000 U.S. large-cap index and tilts its investment toward low carbon emitters. “New York’s aspiration was to, particularly in its passive portfolio — they wanted to start thinking about climate risk in the context of rules-based investing,” says Hugh Lawson, global head of institutional client strategy for GSAM. “The question was posed to us, Was there a way we could do that but maintain the basic risk-return characteristics of our policy benchmark?” The fund will exclude any coal investments and have a slight overweight to financials and health care stocks, and an underweight to utilities and raw materials.

New York Common, which was already making some green investments, has also committed an additional $1.5 billion to sustainable alternative energy.

With institutions like New York Common and the University of California increasing their focus on climate change, the Bloomberg-led task force has been charged with coming up with proposals for how companies should disclose their climate change–related exposure to help financial markets and investors quantify the risk or opportunity. Regardless of the task force’s findings — which are expected to be released a year from now — there is still no consensus in the U.S. that climate change is a real concern. In fact, as oil prices are hitting an 11-year low, some investors see a huge opportunity to buy up distressed oil, natural gas and coal assets, even as others are putting their money in clean energy. The roller coaster ride in carbon-based securities is far from over.

Follow Imogen Rose Smith on Twitter at @imogennyc.