Last year, Dec. 12, 2015 at COP (Conference of Parties ) 21 in Paris, an historic agreement to combat climate change was agreed upon by 195 nations. “The universal agreement’s main aim was to keep a global temperature rise this century below 2 degrees Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels.”

COP 21 was a major milestone in the investment and global economy. Now most institutional investors realise that carbon will be a cost and impact all investors and investments. If Carbon is a cost that means that all investments in companies that have high carbon exposure, will impact returns.

A major warning for the investment community occurred also in 2011, when Carbon Tracker came out with a report which said that most of the unburned oil, gas and coal will have to remain in the ground. Using the work of Potsdam Institute, they calculated that the carbon budget for the entire planet. In order to keep the earth warming to no more than 2°C with a 20% probability, the total carbon budget is 886 GtCO2, minus the emissions from the 20th century. This leaves 565 GtCO@ for the next 40 years until 2050. However, the proven reserves of fossil fuel is 2795 GtCO, with 65% in coal, 22% in oil and 13% in gas.

You can see where this is going. The markets are calculating assets that will not be able to be taken out of the ground. If you can only take 20% of your assets out of the ground but you are calculating 100% towards your assets, you have a problem, which means all investors have a big, big problem. Perhaps the precipitous drop in coal companies share price, was a precursor for the future.

Another major climate agreement, that will impact investors, signed by asset owners and managers has been the Montréal Carbon Pledge. With this pledge, investors commit to measure and publicly disclose the carbon footprint of their investment portfolios on an annual basis.

The Pledge was launched on 25 September 2014 at PRI in Person in Montréal, and is supported by the Principles for Responsible Investment (PRI) and the United Nations Environment Programme Finance Initiative (UNEP FI).

The Montréal Carbon Pledge allows investors (asset owners and investment managers) to formalise their commitment to the goals of the Portfolio Decarbonization Coalition, which mobilises investors to measure, disclose and reduce their portfolio carbon footprints. Over US$100 billion has been committed to this as of COP21.

Montreal Pledge:

“As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that there are long-term investment risks associated with greenhouse gas emissions, climate change and carbon regulation.

In order to better understand, quantify and manage the carbon and climate change related impacts, risks and opportunities in our investments, it is integral to measure our carbon footprint. Therefore, we commit, as a first step, to measure and disclose the carbon footprint of our investments annually with the aim of using this information to develop an engagement strategy and/or identify and set carbon footprint reduction targets.”

The rush is on how to de-carbonize portfolios, which is a major challenge, as well as an opportunity, as carbon is embedded in most investments. Most investors have their assets invested in liquid assets (stocks and bonds). This is historical and in some cases regulatory based for pension funds, by Central Banks. As asset owners scramble to get out of carbon intensive industries, they will look for low carbon exposure in liquid and illiquid assets.

Can you de-carbonize your portfolio easily and only with liquid assets? If one looks at the need for energy, buildings (new and retrofits) and infrastructure requirements from population growth and climate related mitigation, one can see a massive opportunity for asset owners.

What most investors wants at present, is yield, low risk, steady cash flow, little to no technology risk, scale, and track record. All of those requirements are being met by illiquid investments in sustainable transportation, green buildings, and energy.


 “The foreseen population growth and related rising demand for transport will necessitate massive investment in new transport and infrastructure projects and the adequate maintenance of those already in place. Already today, transport investment needs are estimated to be between one and two trillion dollars per year. Of the current total annual investments worldwide, less than 40% is received by developing countries, where the needs, but also opportunities are the greatest.”

“Sustainable transport is defined as a transport system that is safe, accessible, efficient, and environment friendly. Globally, according to the International Energy Agency, transport CO2 emissions are projected to increase 50% by 2030 and 80% by 2050, unless dramatic actions are taken. At present, transport is responsible for 23% of global energy-related greenhouse gas emissions as a result of global dependency on motorization. It will be impossible to address climate change without addressing challenges in the transport sector. Further efforts are needed to shift the current practice to more sustainable transport approaches by improving accessibility, safety and efficiency of movement of goods, people and services.”

“The International Energy Agency estimated that, under a business as usual scenario, the global expenditure on capital investment and, operation and maintenance costs for transport infrastructure (including new roads, upgrade of existing roads, bus rapid transit, high-speed rail, and parking space) would average US$ 2.5-3 trillion annually between now to 2050, with requirements increasing over time (US$ 1.1-1.3 billion for OECD countries and US$ 1.3-1.6 billion for non-OECD countries). Other studies have put forward lower figures.”   Asian Development Bank 2016

Several years ago, I was asked to advise the global network for public transport infrastructure on alternative funding sources. They asked me if they could use carbon finance to fund transportation projects. I advised not to do that, for a variety of reasons. I asked, half jokingly, “when you borrow the money, do you pay it back”. The response was “of course, we are public private partnerships and we are double A Rated” I said “perfect go to asset owners”. You have what they want steady cash flow, no volatility, no technology risk, scale, long track record, and yield”. I was asked, “who are these people”, because normally the public transport systems would go to a corporate finance company who would cut and paste the bond, add a few million to the bill, and go back to the same investors as in the past. These investments were never sexy. Now with negative yields, they have become ultra-sexy.

Low to Zero Carbon Energy

 In the report Mapping the Gap: The Road From Paris, Ceres and Bloomberg New Energy Finance project that to meet the energy needs and keep temperature below 2º, a whopping $12.1 trillion of investment will be needed over the next 25 years. With fuel free energy reaching grid parity, and in many cases without subsidies, this offers another investment opportunity.

Again, investments that provide what investors want in a yield, low risk, steady cash flow, little to no technology risk, scale, and track record.

Green Real Estate

 One of the most popular forms of investments among asset owners is real estate. Buildings are also carbon intensive through the building materials and energy used to build them, maintain them and run them. Buildings use about 40% of global energy, 25% of global water, 40% of global resources, and they emit approximately 1/3 of GHG emissions.


The Empire State Building carried out the largest green retrofit in the world, $550 million. Anthony Mailkin who’s company owned the Empire State Building, was not exactly a green entrepreneur. He was a good business man. Anthony did the math on the energy savings, the effect of being the coolest green office building in NY at the time, higher rents, and ultimately the increased value of the building. The Empire State Building was ultimately sold, after the rertrofit. A recent report by Morgan Stanley looking at 10 major US Urban Centers and the impact of greening established and new buildings showed considerable value creation.

Bricks, Mortar and Carbon

How Sustainable Buildings Drive Real Estate Value

“Overall, the real estate investment team estimates that a typical office building that integrates sustainable practices could help reduce building expenses by 3 to 30 percent, creating $3.5 billion to $34.9 billion of asset value in the top 10 U.S. markets in the process. “     2016 Morgan Stanley Smith Barney LLC.

I believe it will be hard de-carbonize portfolios from listed companies, completely, with a zero sum game strategy. Selling Exxon Mobile to invest in Whole Foods or Cisco can still be problematic, as both have large carbon foot prints(logistics, and server farms).

Investors should look at the massive investment needed in buildings, infrastructure, and energy or water for the next 25 years. These illiquid investments clearly offer investors the ability to put large sums to work with a reasonable market rate return. The value add of having a social, environmental as well as a financial return is the icing on the cake.

You remember what the last Queen of France prior to the French Revolution, said. “Let them eat cake”. Let’s eat.