Proof of Impact Energy Series: Impact investment in Inclusive Energy Transition
Welcome to the first in a series of articles on the use of impact data to unlock investment in inclusive energy transition.
The impact investment universe is too small to provide for all the world’s most important demands, in sectors such as housing, healthcare and education but also conservation, sustainable agriculture, and now — more than ever — renewable energy. Impact investing has an estimated $715 billion assets under management, yet the current financial need to address meeting the Sustainable Development Goals is estimated to be between $3 and $5 trillion annually.
Transitioning to renewable energy is particularly capital intensive. Energy transition alone is estimated to require nearly $30 trillion over the next 30 years.
Given this shortfall, it is clear that mainstream capital must shift its focus to meet these key demands. The good news is that there’s willingness from mainstream capital to invest in assets that are meaningful and contribute to the greater good — assets that help meet the United Nations’ Sustainable Development Goals (SDGs). Philipp Hildebrand, vice chairman of Global investment manager BlackRock, spoke at the Liechtenstein Dialog for Development on 26 March 2021, saying he foresees a ‘tectonic shift in capital allocations to companies that are run sustainably’. In order to make this energy transition successful, investors must commit to financing:
1. Decarbonizing the economy (e.g. increasing renewable energy generation and energy efficiency as well as removal of carbon from the atmosphere through sequestration)
2. Decentralizing energy generation (e.g. distributed energy, mini grids and energy storage); and
3. Digitizing the energy consumption process (e.g. “smart” cities, businesses and homes and ‘pay as you go’ mechanisms)
This commitment comes in part because of a change in corporate risk dynamics and requirements, as we’ve reached a point where hidden risks are no longer tolerable and capital allocations are biased towards those assets that contribute positively to society and the environment.
When they’re firmly funded by mainstream capital, companies should expect to disclose their environmental output, such as carbon emissions, but also other evidence of their impact, such as employment equity and other fair labour practices.
So how to attract mainstream capital to invest in meaningful assets that contribute to the greater good? How do we capitalise on the expectation to disclose impact such as environmental output so investors and companies alike are aligned in responding to regulatory pressures? The answer lies in speaking the language of the mainstream capital universe. This is the language of the risk-return-impact paradigm, as verified impact data uncovers hidden risks and meets future demand to produce better returns. ‘After the 2007 crisis, due to major failure of the financial system to assess “hidden risks”, we are now in need of risk assessments to make the possible liabilities of the externalities transparent and visible in the re-shaping of the finance industry,’ Hildebrand has said. Non-financial key performance indicators (KPIs) — social and environmental outputs — can be the clincher here, as it can make performance transparent and provide accurate evidence (more than purely financial data) of possible risk and also future
Impact data is not always readily available, or hidden in disjointed internal data systems. It often still needs to be collected, cleaned, aggregated, restructured, verified, analysed and reported in a real-time, interactive way that speaks the language of the mainstream capital universe (that is, it has to be standardized, and impact KPIs need to be fully defined) to expand from the impact investment category into all investment allocations. This expansion from the impact investment category into all investment allocations can happen because impact data provides evidence or proof of two things: responsible and inclusive energy transition, and the impact outcomes of this transition.
Proof of responsible and inclusive energy transition
Impact data can help prove that an asset is not only for example moving from fossil fuel to renewables — but that the transition is being managed responsibly and inclusively.
Inclusivity in energy transition can be thought of in different ways. The simplest is looking at its beneficiaries. Who benefits from the transition? Truly inclusive energy transition should benefit or include all, especially those who have no or limited access to energy. In Africa, we’re talking more than 500 million people who don’t have power. In developed markets, inclusivity implies distributing renewable energy to lower-income housing
so that environmental, health and cost benefits are shared
But on another level, inclusivity also refers to the labour practices of the companies that enable the energy transition — are these inclusive of all, and especially of those who might have been marginalised or excluded from the workplace before? Core impact KPIs that quantitatively measure this inclusivity with real data — such as the percentage of women and minority employees or managers — need to be prioritized, with nuances in definitional differences of KPIs clearly laid out for global standardization.
Proof of the outcomes of inclusive energy transition
Finally, as we track verified outputs, we can start showing the impact outcomes of inclusive energy transition in communities at the level of health, education and economic development over time. Similarly, the moment there’s less reliance on expensive forms of energy and savings in terms of sustainable cooking methods, agricultural tools and other solar empowered devices, economic development suddenly becomes more inclusive.
Scenarios highlight the evidence impact data provides. Impact data in the form of the following metrics — including access to energy, QALYs, economic output, community health improvements, reduced pollution, household time savings — from an energy asset in Africa shows it serving populations that would otherwise not have had access to energy, in this way helping to meet SDG7, ‘ensuring access to affordable, reliable, sustainable and modern energy for all’.
On the other hand, impact data from an asset in a developed economy, in the form of efficiency-improvement and baseload fossil-fuel reduction metrics, shows it serving lower-income residential areas or workspaces in an environmentally friendly, cost-effective way, with benefits being passed on to others. The data also provides evidence of an energy company’s gender-fair and inclusive working environment.
A scenario returning us to the risk-adjusted return language of the mainstream capital universe is a manufacturing facility in South Africa that transitions from (100 percent reliance on) the public energy utility (fossil fuel) to solar.
The impact data shows energy supply and demand once the plant has transitioned to solar, who this energy will be distributed to and at what cost, and this data covers both risk and potential return. This data can show that the asset is pretty much guaranteed to keep functioning, as it’s no longer at risk of production downtime or equipment damage due to power outages, plus the returns are guaranteed, as it generates more (solar) power than it needs. With such a favourable risk-return analysis, any investor — even one in the mainstream capital universe — is bound to look at it because it makes economic sense.
‘For many companies, nonfinancial metrics … can reveal hundreds of millions of dollars in sustainability-related savings and growth. In large companies it can be millions,’ write Tensie Whelan and Elyse Douglas from the New York University Stern Center for Sustainable Business in a recent article for the Harvard Business Review. A scenario from the developed world would be a retailer like Walmart installing solar panels on all its flat-roof stores. The impact data could provide evidence of Walmart generating sufficient solar power to meet its in-store (refrigeration) and energy needs.
In the next part of this series on impact investment in inclusive energy transition, we move from scenarios to real life, providing a case study of what impact data could unlock firstly for an individual company enabling energy transition and secondly for investors.