A slew of public pension fund giants have swung their weight behind Just Climate’s Climate Assets Fund I (CAF1), which has exceeded its US$1 billion target by 50% and marks the latest of several sovereign-backed billion-plus funds.
The US$1.5 billion fund is aiming to invest in “the highest impact solutions that can radically reduce or remove emissions, while generating attractive risk-adjusted financial returns”. Sovereign investors backing the fund include the California State Teachers' Retirement System (CalSTRS), Canada’s PSP Investments, and Sweden’s AP2 and AP4 funds. The founding investor group includes the Ireland Strategic Investment Fund (ISIF), with Microsoft's Climate Innovation Fund anchoring the LP.
Just Climate says the fund will be part of its industrial climate solutions focus, concentrating on “growth-stage, asset-heavy companies” in some of the “highest-emitting, hard-to-abate industries — including energy, mobility, industry and buildings.”
The fund is part of a trend in the sovereign investor universe to seek partnerships and aggressively grow exposure to low-carbon assets and energy transition. The new fund is dwarfed by Brookfield’s Global Transition Fund, which closed at US$15 billion last June, with the backing of Canadian public pension funds PSP Investments, IMCO and OTPP as well as Temasek and the New York State Common Retirement Fund (NYSCRF).
The fund is investing in the “transformation of carbon-intensive industries”, as well as clean energy projects with its first investments including the take-over of the German-American solar power and battery developer Sunovis, which has a development pipeline capacity of about 25GW. The firm also invested in Entropy, a carbon capture and storage developer, and in a development partnership with UK battery storage provider Cambridge Power. With the signing of an agreement to acquire Origin Energy, Australia’s largest integrated power generator and energy retailer, GTF was more than 85% invested and/or committed by May 2023.
Brookfield is planning to launch its second Global Transition Fund in the first half of this year. GTF 2 will be “meaningfully larger” than its predecessor. Like GTF1 and CAF1, it will follow a growth equity and infrastructure strategy focused on emissions reduction and emissions avoidance worldwide, in “hardest-to-abate but critical sectors such as power, industrials, transport and energy”. State-owned investors are likely to be prominent in the second fund with the likelihood of a return of the backers of GTF1 as well as new funds.
Interest in climate-oriented funds was stimulated during the Covid-19 pandemic. Global SWF data show that state-owned investors directly deployed more than US$18.3 billion in capital to renewables in 2021, up 136% on 2020 - which itself was a record-breaking year. While investment dropped to US$15.5 billion in 2022, it was still a significant investment, representing 15% of infrastructure spend by SOIs.
Partnerships that draw in a range of institutional investors are supporting growth. In July 2021, TPG raised US$5.4 billion for its inaugural fund, the TPG Rise Climate Fund, under its climate investing strategy from a range of institutional investors, including OTPP and Saudi Arabia's Public Investment Fund (PIF). The Rise Climate Fund focuses on three themes: energy transition and green mobility; sustainable fuels; and negative emissions. By end-2022, it had achieved total capital commitments of US$7.2 billion with US$2.2 billion equity invested in 13 companies.
One of the earlier climate-sensitive mega-deals was BlackRock’s partnership with Singaporean state-owned investor Temasek. In April 2021, the two organizations agreed to team up to invest in private companies that use technology to reduce carbon emissions. The partnership - Decarbonization Partners – aims to launch a series of late-stage venture capital and early growth private equity investment funds and agreed to commit a combined US$600 million in initial capital to invest across the funds, which would also raise money from third-party investors and be managed by staff from both partners. The first fund has a target of US$1 billion.
Since its establishment, the partnership has back alternative leather producer MycoWorks, lithium-silicon battery manufacturer Group 14 Technologies, materials company Monolith, and carbon offsets facilitator Carbon Direct. Earlier this year, Decarbonization Partners established a strategic relationship with Mizuho Financial Group that will enable Mizuho to introduce its clients to the global Decarbonization Partners ecosystem, and may create financing and partnership opportunities for new, innovative companies in the partnership's portfolio companies.
