What I Learned at the Forum on Climate Investing

The goal was simple. Create a space where both sides of the climate change equation – the mission-driven advocates for addressing climate change and those concerned with responsible stewardship of institutional capital – could come together and discuss the merits of investment strategies that align return-seeking capital with climate change mitigation and adaptation efforts.

Last month, the Doris Duke Foundation and RockCreek co-hosted a groundbreaking event on climate investing. The Forum for Climate Investing brought together an interdisciplinary group for an intimate gathering at Duke Farms. Immersed in the natural beauty of the farm, we gathered to have an honest and open conversation about climate investing.

I know firsthand that opportunities to gather like this and speak so candidly are unique. Not surprisingly, most conversations tend to either emphasize the need to mobilize capital in the fight against climate change without an adequate focus on the actual return potential, or end up debating the perceived challenges of investing in the space without acknowledging the real breadth of the opportunity set.

As a leading climate-focused funder, the Doris Duke Foundation, in collaboration with RockCreek, another leader in values-aligned investing, sought to change the narrative with this forum. We are well aware of the enormous amount of capital required to tackle the climate crisis, and we understand the urgency. Instead of being overwhelmed by the enormity of the problem, our aim was to explore the landscape of actual investable opportunities: their potential, scale, and accompanying risks. And there was much to learn.

Throughout the two-day forum, and in subsequent discussions, it became evident that the climate ecosystem offers numerous reasons for optimism when viewed from an investment perspective. Here are some sources of opportunity that emerged:

·??????The influx of new talent in this space is transforming the game. ?Lived experiences seeing the impacts of climate change across the globe has become a motivating force across generations. From seasoned entrepreneurs who are looking to build their new companies in this space, to fresh college graduates wanting to devote their careers to addressing climate change, the influx of smart and driven talent is a strong tailwind for the sector.

·??????The quality and the quantity of companies in the space has improved considerably compared to previous cycles. At the forum, several companies presented scalable solutions to the climate crisis from diverse perspectives. It was clear that these businesses are driven not only by regulations and policies but also by organic customer demand, business opportunities, and risk mitigation. Moreover, this shift is not limited to startups alone; established companies across industries are now focusing more on the intersection of environmental and business challenges, as well as the need to reduce their cost of capital. Such incumbents can be instrumental in helping new companies reach larger markets and scale their offerings.

·??????Climate issues cut across industries, making climate investing a horizontal rather than a vertical endeavor. Investors are broadening their perspective and looking across sectors to find value-added companies that contribute to environmental goals. Climate investing doesn’t just mean electric vehicles or direct air capture technology. The need to become more efficient and more sustainable touches companies in every industry. Examples of such companies include software companies focused helping utilities optimize renewable energy output and use, sustainable packaging companies focused on reducing the negative impacts of the consumer goods space, and agriculture-focused companies using technology and analytics to reduce power, fertilizer and water usage.

·??????Venture capitalists are leveraging lessons learned from the past with an expanded opportunity set. Compared to the Cleantech 1.0 era, VC investors now encounter a wider range of companies in the climate space. They can draw on the experiences of their peers and avoid key mistakes made previously. A lot of climate-focused venture in the past focused on capital intensive solutions with unproven technologies and long pathways to commercialization. Those types of companies are still out there and can still make for impactful and financially successful investments. However, that is no longer the only risk profile VC investors are targeting. There are now a large amount of dollars going into software-oriented companies that are coming up with solutions to problems posed by climate risk. Much of the climate-tech VC investment we are seeing today is actually very similar to the style of investing that Silicon Valley has perfected. And for truly nascent areas like natural climate solutions, there is a financial sophistication being applied to the space that is refreshing to see.

·??????Policy plays a crucial role in shaping the landscape. The Inflation Reduction Act (IRA) stands out as an extensive and forward-looking set of policy initiatives. It surpasses the efforts of any other government worldwide, with some panelists describing it as the United States leapfrogging Europe. The program not only provides funding and incentives to expedite the energy transition using existing tools but also allocates significant resources to adopt innovative solutions.

·??????Equity is a vital consideration for entrepreneurs in the climate space. Communities of color, both in the United States and globally, desire solutions that resonate with their specific needs and experiences. Addressing the climate crisis effectively requires working collaboratively with these communities, ensuring their voices are heard and their concerns are integrated into climate-focused initiatives.

While the opportunities in the climate investing space are vast, it is important for investors to remain aware of ongoing challenges that require appropriate risk compensation and a clear understanding of the obstacles faced when investing in this domain. Here are some challenges that were highlighted during the forum:

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·??????One of the first issues identified in conversations at the forum was the real gap in funding for companies between the very early stages of venture capital and the much later, mature stages of investing. The growth stage of company building seems to be an opportunity for direct investors, but also in the current funding environment, a real challenge to early-stage companies and their investors as these companies graduate to the next stages of growth and find a real dearth of capital.

·??????Another big challenge highlighted by many of our speakers was the lack of clarity in policy implementation. Although the IRA is a significantly ambitious climate-focused agenda, how it translates to implementation at state and county level remains to be worked out.

·??????Valuations in the climate space remain challenging. As one of the few sectors, alongside artificial intelligence (AI), attracting significant investor interest in an otherwise cooled-off market, climate tech valuations appear stretched and present a hurdle for investors.

·??????Solving the climate crisis requires global collaboration, as a substantial portion of the global population is suffering from the effects of climate change despite having contributed little to its causes. Addressing the market failures associated with development and emissions, particularly outside the United States, presents a challenging yet necessary endeavor for the global community. Decoupling GDP growth and emissions will demand significant efforts and innovative approaches.

In addition to exploring the opportunities and challenges of climate investing, another compelling theme that emerged during speaker conversations was the integration of broader goals within organizations, such as the Doris Duke Foundation. Chief Investment Officers from various capital pools candidly discussed their attempts to align their organization's objectives with their investment portfolios and the challenges they faced in doing so. We now recognize that investment offices and their teams can no longer operate in isolation, detached from their organizations' priorities. The job has become more nuanced. Regarding climate alignment, resistance to integration can lead to a failure to account for major climate-related risks and long-term financial opportunities in portfolios.

Personally, what inspired me most about the climate forum was the energy and passion exhibited by all the participants. The forum served as a powerful reminder that the challenges of tomorrow cannot be addressed using yesterday's strategies. We must adopt new ways of working—urgently and creatively—to tackle the climate crisis. As investors supporting organizations dedicated to solving this crisis, we need to adapt our investment strategies accordingly. We must develop approaches to invest in a world where climate risks have reshaped the risk-reward profiles of entire asset classes. Simultaneously, we must fulfill our fiduciary responsibilities and invest in new areas and types of companies. Institutional investors have numerous avenues for incorporating climate considerations into their portfolios, which align with their long-term fiduciary mindset and often lead to financial benefits. As one of our thoughtful speakers reminded us, the Latin root of the word "fiduciary" is "fiducia," meaning trust. The trust placed in us by our organizations as we manage capital pools reflects a commitment to a thriving, long-term future rather than a sole focus on near-term returns.

At the Doris Duke Foundation, we eagerly anticipate leading more conversations like this one and creating meaningful spaces where our friends and colleagues can learn together. It is through these collaborative efforts that we will evolve and discover solutions to our most pressing challenges.

Leena Bhutta is the Chief Investment Officer for the Doris Duke Foundation, which supports the wellbeing of people and the planet for a more creative, equitable and sustainable future. As CIO of an integrated investment team, Leena directs all investment activity for the foundation’s portfolio, including mission-aligned investing.

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