Explore a range of solutions
Climate change is already leading to significant demand for solutions and we expect this to increase substantially as the realities of climate change start to bite. Channeling capital toward these solution providers helps not only to expand capacity and incentivize talent, but also to curb longer-term climate risks, while providing investors with exposure to significant long-term return potential. Solutions are wide ranging and fall into three broad categories:
Mitigation: products and services that reduce the use of energy
Transition: products and services that draw on greener sources of energy
Adaptation: products and services that build resilience to the threats of physical climate risk
We estimate the public equity climate opportunity set across these categories currently includes approximately 850 companies, representing US$13.6 trillion in market value. In private equity, climate innovation is taking shape as an asset class in its own right, with more than 3,000 clean-tech startups. This segment is attracting significant capital: For instance, in the first half of 2021, 600 climate tech startups raised US$60 billion, a 200% year-over-year increase.1
In our view, an elegant method of achieving all these objectives is investing in a range of climate solutions, specifically those for which portfolio managers commit to engaging with portfolio companies on their transition plans. With such an approach, portfolios access the breadth of climate opportunities, position themselves ahead of secular climate trends, and decarbonize organically over time.
We illustrate how that may work in practice with two potential exposures for the public equity component of a climate-solutions portfolio. Both components enable investors to focus on the opportunities associated with climate mitigation and adaptation, while reducing transition risk. However, they come with distinct characteristics that fit different investor profiles.