— Survey finds most asset owners expect to increase climate investments over the next three years, however, several frictions and barriers are inhibiting progress.
— Respondents highlight the need for an enabling ecosystem to complete a climate “relay race” from catalytic, high-risk capital to institutional, lower-cost-of-capital projects.
S2G Ventures (“S2G”), a multi-stage investment firm focused on the food and agriculture, oceans, and energy sectors, today released a new report – The Climate Finance Relay Race. The report examines how asset owners are approaching climate investing, the reasoning behind their strategies, and potential pathways to increase capital flows.
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A future ten billion person planet and the corresponding thermodynamic demand for resources is outpacing supply; 1.7 planet Earths are required to sustain the current rate of human consumption. Increasingly complex geopolitics is creating significant commodity price volatility and uncertainty about future food and energy security. This unsustainable trajectory highlights the urgent need for innovative solutions that can improve resource efficiency and shift us toward more sustainable production systems. A review of historical leaps in productivity – from the steam engine and railroads to chips and computing power – shows that innovation in capital markets has been critical to these transitions.
S2G believes investment in this “climate megatrend” offers an unprecedented opportunity to drive resource productivity, reduce volatility, and generate sustainable economic growth in a world of climate adaptation. However, climate investing is relatively new, siloed, and underrepresented. The lack of “fit for purpose” capital markets to finance new sources of resource productivity or reduce climate volatility is becoming increasingly topical. Further, there is an estimated $30 trillion in opportunity to invest in climate transition through 2030, with only about 20% of that opportunity being met.
As discussed in S2G’s prior report, “The Missing Middle: Capital Imbalances in the Energy Transition,” capital markets are heavily skewed toward either early-stage or infrastructure-focused funds with much less headline capital available for the growth stage. This creates a critical funding bottleneck for higher potential, albeit yet-to-be de-risked concepts. Asset owners, representing over $450 trillion in global assets, have tremendous potential to close this gap in the market.
“To meet this investment opportunity, S2G believes we need to connect the dots between asset classes and asset owners – a fit-for-purpose capital market system was critical for prior productivity revolutions and is missing in this segment of the market,” said Sanjeev Krishnan, managing partner at S2G. “To accomplish this, we need an enabling ecosystem for asset owners, investors, innovators, and infrastructure to facilitate increased collaboration across this spectrum.”
To better understand how to close this funding gap, S2G conducted interviews and a survey of 50+ asset owners managing trillions in capital to gather context and feedback on opportunities and frictions to climate-related underwriting.
Key findings (as of August 2024 survey):
— Most asset owners have or are considering climate targets (70%) and have made changes to enable increased focus on the climate megatrend (82%). However, across the landscape of asset owners, approaches to climate investing are varied and significant opportunities for leadership remain.
— While most asset owners expect to increase climate investments over the next three years (74%), survey respondents cite several frictions and barriers that inhibit progress. For example, five organizational limitations are incentive, capacity, emerging manager policies, strategy alignment, and organizational structure.
— Asset owners are receptive to engagement with external entities on climate investing but need to see applicability and value-add to their programs. Survey respondents prioritize investment performance, regulatory and policy action, board-level support, and transparent KPIs as top drivers of increased focus on climate and are most interested in engagement with government (58%), academia and advocacy organizations (38%), and GPs and financial intermediaries (34%).
Asset owners hold tremendous market influence and the potential to increase climate investment by orders of magnitude, even with small, marginal changes to their approach. However, S2G finds that the development of the enabling ecosystem is critical to navigating market and asset-owner-specific frictions to climate investment. S2G offers six suggestions for how the enabling ecosystem can best engage with asset owners to complete the climate “relay race” from catalytic, high-risk capital to institutional, lower-cost-of-capital projects.
To read the full report, please download here. For further insights, tune in to the S2G Podcast episode, ‘Why We Need a Climate Finance Relay Race.’
About S2G Ventures:S2G is a multi-stage investment firm focused on venture and growth-stage businesses across food and agriculture, oceans and energy. The firm provides capital and value-added resourcesto entrepreneurs and leadership teams pursuing innovative market-based solutions that S2Gbelieves are cheaper, faster or better than traditional alternatives. With a commitment tocreating long-term, measurable outcomes, S2G structures flexible capital solutions that canrange from seed and venture funding through growth equity to debt and infrastructure financing.
For more information about S2G, visit s2gventures.com or connect with us on LinkedIn.
Media Contact:Ally Dunneally@s2gventures.com
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