(Bloomberg) -- Investors seeking to generate returns by plowing money into the energy transition would be well-advised to focus their attention, and dollars, on private markets.
That’s according to new research from MSCI Inc. During the past five years, a sample portfolio of investments in private companies that touch aspects of renewable energy, electric vehicles and energy storage generated cumulative returns of 123%, which compares with 57% for a similar portfolio of publicly traded companies.
Of course, past performance is no guarantee of future returns, as the saying goes. And Abdulla Zaid, vice president at MSCI and co-author of the report, said in a response to questions from Bloomberg Green that understanding the performance data will “require a careful review of the underlying structural and operational characteristics” of both asset classes.
“There’s a lot of innovation happening and being financed to develop climate-mitigation solutions in private markets,” said Zaid. “This area of the market has been known for its opacity, and investors may need to take a closer look at how their portfolio companies are positioned to capture value from the transition and how they may leverage climate-related technological innovation and shifting policy.”
Given the slump in clean-energy stocks—the S&P Global Clean Energy Index is down about 40% since the beginning of 2023—the report serves as a reminder that institutional investors have other ways to gain exposure to the energy transition, said Chris Cote, vice president for sector and thematic research at MSCI.
Private markets for low-carbon investments also are growing at a faster pace, with a five-year compound annual growth rate of 17% through June, compared with 11.9% for the public markets. As a qualifier, MSCI adds that the public market for green companies is 23 times larger, even if it’s growing at a slower rate.
Some private-markets proponents have argued they’re better-suited for shepherding the multi-year corporate transformations required by the energy transition. KKR & Co. said earlier this year that the stock market’s fixation on quarterly earnings and short-term performance makes it a suboptimal funding venue for companies critical to the energy transition.
“Private funds’ relatively long holding periods of assets may allow investors to identify growth opportunities, optimize operations and capitalize on long-term, low-carbon trends—a few factors that may maximize exit valuations,” Zaid said.
Recent research from BloombergNEF shows money managers overseeing private equity and debt portfolios are more exposed to low-carbon energy assets than to fossil fuels. And Nils Rode, chief investment officer of Schroders Capital, said he expects this trend to continue into 2025, even with Donald Trump—a vigorous supporter of fossil fuels and opponent of ESG—in the White House.
“Despite political changes in the US, we expect the trend towards decarbonization to persist, driven by its strong economic rationale, with private market investments continuing to play a pivotal role in driving the global energy transition,” Rode said in his 2025 outlook.
Given the scale of the climate challenge, funding for the energy transition will need to be scaled up in all markets if climate goals are to be met. Still, MSCI said investors “are increasingly realizing that their net-zero portfolio targets may be slipping out of reach without accelerated progress in the real economy”—and that makes them open to new ideas.
For institutional investors with decarbonization goals, that has to include private markets, Cote said.
Sustainable finance in brief
But what if the return of Trump, and his promise to undo the climate legislation and regulations pushed through by President Joe Biden, doesn’t have the expected negative effect on climate investment? This is the counter-narrative some on Wall Street are throwing out there. It may end up being a uniquely good time to add green investments, says Hamish Chamberlayne, head of global sustainable equities and a portfolio manager at Janus Henderson Investors. “While market sentiment is negative and there are understandable expectations for a slowdown in sustainability-related investment themes, we believe, if history is any guide, we could actually be approaching a compelling time to invest,” he said in an article published on the Janus Henderson website. The assessment follows a deep selloff of traditional green assets, including wind and solar. So how would this work? Well, some of it is tied to the fact that Trump often doesn’t do—or isn’t able to do—what he says he will do.
- Janus isn’t the only firm telling green investors not to panic. Impax Asset Management Group Plc says those looking at transition financing should focus on inflation, and how it may not spike under Trump after all.
- Good vibes aside, Wall Street is still fleeing Republican attacks on all things environmental, social and governance. Goldman Sachs Group Inc., for instance, is quitting a major climate group for banks.
- Bank of America Corp. meanwhile is establishing itself as a repeat dealmaker in a nascent market that helps emerging economies refinance debt, and use any money saved on conservation.
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