By KKR Nov 11, 2022
We convened experts from our investment teams and our KKR Sustainability Expert Advisory Council (SEAC) to cover several important aspects of investing in the energy transition, energy security, and climate action for the third installment in our “Investing in Sustainability” series. In a one-on-one conversation and a panel discussion, they covered recent policy changes around the world, potential impacts on investors and companies to why the energy transition has become a business issue that affects companies across sectors and geographies. Here are some key takeaways from the discussions.
Takeaway 1: Momentum on global climate action is building.
Real changes are occurring in industry and among consumers that have made the transition to a clean energy system both more pressing and more tangible:
- Governments aim to ramp up climate-related spending: In their discussion, Neil Brown, a Managing Director for the KKR Global Institute and KKR Infrastructure, and Nat Keohane, President of the Center for Climate and Energy Solutions and a member of KKR’s SEAC, went over some of the major recent policy initiatives that could help drive the energy transition forward. The REPowerEU Plan, created to wean Europe off Russian fossil fuels, aims to significantly increase renewable energy production from 37% of the energy mix in 2021 to 69% in 2030, for example. The U.S. Inflation Reduction Act allocates an estimated $370 billion to climate spending; this number is an estimate because the tax incentives in the legislation are uncapped. Benoit Allehaut, a Managing Director on KKR’s Infrastructure team, points out that the incentives for hydrogen energy technologies alone could grow that market by a factor of 80.
- Technology is improving: Allehaut notes that the largest solar project in 2006 was an 11MW project in Portugal. Today, the Bhadla Solar Park in India is 2.25 GW, some 200 times bigger. Even before the enormous run-up in fossil fuel prices this year, the increasing efficiency of solar and wind technology had already brought the unsubsidized costs of renewables closer to parity, and in some regions these are the cheapest energy options. Scientists and engineers are also working on carbon removal, carbon sequestration and storage, hydrogen power, long-duration energy storage, and other innovative solutions to climate change.
- Geopolitics spotlights the importance of integrating sustainability with security and affordability: Russia’s invasion of Ukraine contributed to soaring global energy costs, jeopardized Europe’s natural gas supply, and jumpstarted an effort to build out renewable energy capacity. Meanwhile, geopolitical competition between the United States and China increasingly includes clean energy technology and industrial policy, particularly on clean energy technology. Brown points out that the energy transition relies on public support, which it is more likely to achieve if new clean energy assets help people access more affordable, reliable energy without the threat of hostile actors who can turn off the spigot at any time.
Takeaway 2: Climate is a risk and potential opportunity for businesses.
Rami Bibi, Head of Europe for KKR Global Impact held up climate change as a classic example of an externality―a consequence of business activity that affects others, but is not reflected in the price of what the company sells―and reminded us that economic theory suggests that government intervention is the solution for such externalities. Indeed, many countries have imposed a price on carbon through a carbon tax or carbon emissions trading system, while others have created an indirect cost through regulation. It’s worth noting, too, that regulation and the potential physical effects of climate have the potential to affect not only an individual company’s business, but also its supply chains. In addition, there continues to be increased regulatory focus on companies and investment funds disclosing ESG-related information.
Some companies have found financial and other benefits associated with reducing climate risk via product development or operational change. For example, panelist Corinne Sawers, a member of KKR Capstone who works on operational ESG issues in Europe, says that while companies will in most cases need to invest if they wish to reduce emissions, some may also either uncover lucrative new business opportunities from the broader push toward decarbonization or lower their costs by reducing their consumption of energy or other resources. Viridor, a KKR portfolio company in the United Kingdom, is a prime example. The company captures methane produced from decomposing trash at its waste-to-energy facilities and uses it to create electricity that powers 700,000 homes. This electricity business generates significant revenues for the company.
She and Sabine Hoefnagel, Global Leader of Sustainability and Risk at ERM, a global sustainability consultancy and KKR portfolio company, also point out that many consumers and employees are increasingly aware of and concerned about climate issues. Many younger workers entering the workforce for the first time are very interested in climate issues and are pushing for change in their organizations. Nearly half of Millennials and Generation Z workers told the Deloitte Global 2022 Gen Z and Millennial Survey that they have put some pressure on their employers to take action against climate change. In the global battle raging to attract and retain top talent, it’s an issue to which management teams are paying attention: Roughly two-thirds of business leaders said in the 2022 Deloitte CxO Sustainability Report that they feel pressure from their employees to act on climate.
Takeaway 3: The most effective corporate climate action often entails education, incentives, and for larger companies, thinking beyond the four walls.
Recognizing that climate is a business issue is one thing, but how can companies address it? Keohane suggested that companies should address their own emissions as well as the emissions in their supply chains and the emissions that result when customers use their products. He also suggested that larger companies can show true climate leadership by investing in credible third-party efforts to reduce global emissions and by advocating publicly for well-designed climate policies that are in line with their business model, public commitments and goals.
Sawers notes that for companies that are just starting to tackle emissions, it’s prudent to start with good information about managing climate risk and making robust mitigation plans. Educating both executives and the broader workforce about climate issues and why they matter to the company can be another effective way to advance climate action.
Takeaway 4: There is an important nexus between the energy transition, energy security, and economic competitiveness.
Brown notes that there has been a “false tradeoff” in the discussion between climate and national security. As he points out, achieving long-term energy security and sustainability is not as simple as switching fuels. The changing relationship between China and the U.S., as well as other economies, is worth watching in this regard, as China is an important player in many clean energy supply chains, from batteries to solar panels. Brown believes it will become increasingly clear that the energy transition is also critical to economic advancement. Governments all over the world are likely to want their own countries and regions to capitalize on the transformation taking shape not only in the energy sector, but also in industrials, transportation, and agriculture. As Brown and Keohane discuss, this underlies the recent surge in new industrial policies. Indeed, Sawers notes that climate initiatives have become “synonymous with being a competitive, globally sophisticated company or country.” Our panelists agree that private capital will play an important role in ensuring a reliable, secure, and affordable energy transition, and that the transition also presents an attractive investment opportunity.
We invite you to watch the discussions in full below:
Part I: Macro and Policy Perspectives on Climate
Part II: Investing in Solutions for the Energy Transition
Notwithstanding KKR’s publication of this article to its website, the views expressed herein are the personal views of Neil Brown of KKR, Corinne Sawers of KKR, Benoit Allehaut of KKR, Rami Bibi of KKR, Sabine Hoefnagel of ERM, and Nat Keohane of KKR’s Sustainable Expert Advisory Council (SEAC) and do not necessarily reflect the views of KKR or the strategies and products that KKR offers or invests. Further, the inclusion of such views herein do not constitute a representation that KKR has adopted or intends to adopt practices that align with such views. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This blog is prepared solely for information purposes and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This blog contains projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and none of KKR, Mr. Brown, Mrs. Sawers, Mr. Allehaut, Mr. Bibi, Ms. Hoefnagel, and Mr. Keohane assume any duty to update such statements except as required by law. Certain information contained herein has also been obtained from third parties, and in certain cases have not been updated through the date hereof. KKR makes no representation or warranty, express or implied, with respect to the accuracy, fairness, reasonableness or completeness of any of the information contained herein, and expressly disclaims any responsibility or liability therefor. There can be no assurance that KKR’s environmental, social, and governance (ESG) policies and procedures (to the extent described in this publication) will continue; such policies and procedures could change, even materially, or may not be applied to a particular investment. KKR is permitted to determine in its discretion that it is not feasible or practical to implement or complete certain of its ESG initiatives, policies, and procedures based on cost, timing, or other considerations.
1. “Lazard’s Levelized Cost of Energy Analysis, Version 15.0.” October 28, 2021.https://www.lazard.com/perspective/levelized-cost-of-energy-levelized-cost-of-storage-and-levelized-cost-of-hydrogen/
2. KKR Capstone is comprised of a team of industry experts on various subjects who advise KKR’s portfolio companies and investment professionals on operational issues.