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Goldman Sachs Is Our Best Bet Against Climate Change

Although it's not everyone's first choice as a White Knight, the financial giant can help transform the renewables market

The Goldman Sachs tower in Jersey City, New Jersey, home of a powerful investment banking firm that could help make the renewable energy market a cohesive area for growth.
Image Credit: Wikimedia Commons

Although it may not be the obvious hero, Goldman Sachs — usually more Vampire Squid than White Knight — and its cohorts could be responsible for transitioning the renewables sector from a fragmented and esoteric industry to one of mainstream dominance. Goldman Sachs has facilitated the development of world-encompassing industries before and they will do it again.

In its 2014 Annual Report, Goldman compares the potential of the renewables market to that of the Internet: “Mass market adoption of any new, disruptive industry often takes a path of early enthusiasm followed by market rejection, volatility and ultimately, acceptance. This was true of the Internet, and evidence suggests a similar course when it comes to clean technology and renewable energy.”

The information revolution saw us move from only 1 percent of the world’s information communicated online in 1993 to 97 percent by 2007. In comparison, the U.S. Department of Energy’s goal to increase solar energy output from 1 percent to 10 percent by 2025 is modest, and yet would dramatically grow the renewables industry.

Behind this growth are Goldman Sachs, Citi, JPMorgan and the rest of the institutional investment industry, moving increasing volumes of capital into this market as it matures and sheds risk. The capital markets are one of the most powerful forces humanity has created, and while occasionally (OK, often) it can go rogue, harnessing its power is the only realistic way that renewable energy will receive the investment capital needed to scale and have the impact we need.

The “right things to do” make economic sense

Flying less, recycling more, and being better to the planet are things we should all do; affordable renewable energy solutions and high-tech innovations are things we all have. But it’s clear these aren’t enough to change the course on which we find ourselves. Large amounts of capital are needed to advance renewable energy from fringe to dominance, which only the financial industry can deploy. Thirty years of technological advances provided the kindling, but it’s capital market gasoline that will really get things going.

Right now there are (metaphorical) thick clouds of smoke billowing from the financial sector. Goldman Sachs is investing $40 billion in renewables by 2021. Citi has committed $100 billion to the facilitation of clean energy by 2025, and Berkshire Hathaway is investing $15 billion into solar and wind projects at Warren Buffet’s personal behest. Within investment banks, new groups have been created to focus on clean energy development and businesses, such as Morgan Stanley’s Institute for Sustainable Investing and JPMorgan’s Environmental and Social Risk Management division.

These decisions weren’t made because they are the right things to do (although they are), but because they make economic sense. Renewables must deliver strong returns first, and the double bottom line impact of benefiting the environment second. This may seem calculated, but tapping capital markets is absolutely crucial to the health of the planet. Investing in clean energy is a smart decision — not just a personal passion — and that’s what will allow renewables to achieve global scale.

To date, capital markets are igniting growth in renewables by reducing capital costs, investing in better ideas, and financial innovation.

Reducing capital costs

Third-party financing plays an important role in the capital markets, as one person’s loan is another person’s income. Providing affordable financing to cover any upfront clean energy adoption costs is one of the easiest ways to drive change at the consumer level. The P2P (peer-to-peer) lending space is booming with online alternative lenders, such as Lending Club, Prosper, and Fundera, and the model has taken off in the renewables sector.

SunFunder and SparkFund are tackling renewable energy financing issues in emerging-market solar and energy efficiency, respectively. Reducing capital costs for individuals and small businesses creates a virtuous cycle: cheap capital expands the customer pool, which increases product demand, and that allows manufacturers to offer cheaper and cheaper panels, expanding the customer pool even more.

The fuel of this virtuous cycle is capital, and the combination of flexible online solar lenders and institutional capital will amply provide for future growth.

Investing in good ideas

The renewables industry wouldn’t be as advanced as it is today if not for the billions of investment dollars poured into it. In 2014 global investment in clean energy reached $310 billion. Cleantech firms raised over $18.7 billion and venture capital and private equity investment in the industry reached $4.8 billion. Early investment in firms such as SolarCity, Enphase, and Clean Power Finance accelerated the growth of solar by at least five years, transforming it to be today’s compelling power source.

The energy industry is one of America’s oldest, and, as is happening in the fintech (financial technology) space, is being challenged by new market entrants who are using apps, the web, and SaaS (software as a service) products to make things faster, better, and smarter.

From better underwriting models to products that provide greater control over home efficiency, such as the Nest thermostat, funneling investor capital toward good ideas that are bringing renewables to scale is increasing the industry’s size, influence, and accessibility dramatically.

Financial innovation

It used to be that only the largest of financial institutions could invest in renewables, but new products are providing access across nearly every asset class. Over the past few years the introduction of green bonds, YieldCos (companies that predominantly distribute cash flows from owned operating assets as dividends or other payments to investors), and clean energy index funds, while still early, show promising initial returns, indicating that the market has an appetite for “green-backed” financial products. This contradicts the false assumptions that investing in the environment and investing for returns cannot co-exist.

Today’s products are just the tip of the iceberg. Emerging solutions include more ways to repackage debt (such as renewable-backed securitized products or energy mezzanine financing) and financing constructs that generate revenue based on projected savings, such as social impact bonds.

As Michael Eckhart, managing director at Citi, said in an interview with Clean Energy Finance Forum, “I think we are 40 years into a 100-year transition to a clean finance economy. The momentum is going in our favor and we are succeeding.”

Like the tech industry, the renewables market has waxed and waned, but the constantly decreasing cost of technology drives both forward. As hardware costs continue to decrease and renewable equipment becomes more commonplace, software-based firms will build better mousetraps and bring new solutions to old problems.

Underlying all this will be an infrastructure of capital flowing from one entity to the next, responsible for thousands (probably millions) of jobs and billions in global economic growth.

If Internet-like growth is to be achieved, then we have reason to be optimistic about the future of our environment. Right now we may be at the stage with renewables of reading articles explaining what “www” means and why you can’t use a landline phone and the Internet at the same time.

But it also means that across the country you have the renewable energy versions of Bill Gates, Steve Jobs, and Larry Page working in garages, developing innovative products we didn’t know we needed until they change the world. However, this time, there is one key difference: As markets mature, investments are made, and returns are reaped, not only Goldman Sachs profits. We all do.

Bryan Birsic is co-founder and CEO at Wunder Capital, a renewable energy investment company in Boulder, CO. This blog was originally posted at TechCrunch.

18 Comments

  1. Eric Habegger | | #1

    Seriously...?
    Is there any end to the gullibility of humankind to bad actors repeatedly being given a second, third, fourth chance? Yes, this is fantastic. All the energy and enthusiasm of the common man of building a green world is usurped and given to corporations. Then the corporations ration it back to us, while rigging the operation to benefit the wealthy few. Terrific. I guess the 2008 real estate debacle that resulted in a world wide mini depression that some places are yet to climb out of, is ancient history that we just can't be bothered with. Remember, there's money to be made here. The fact that there was major malfeasance on the part of Goldman Sachs that caused that even shouldn't bother us a whit.

    Hey, let's get those guys at Enron back together!! I'm sure they could all make us some short term profits at the expense of the average guy. Who cares about the average guy anyway when there's money to be made! Oh, and while were at it, lets bulldoze the opposition to rigging the system by labeling those opponents as proponents of big government. We don't need no stink'in regulations.

  2. User avater GBA Editor
    Martin Holladay | | #2

    Response to Eric Habegger
    [Smile.]

  3. Kevin Dickson, MSME | | #3

    Still Better, of course
    1. Renewables spread the wealth better than Big Oil and Big Electric. Even if Big Money is behind renewables.

    2. If we don't need Big Oil, then the politicians have no reason to invade Middle East countries. That's huge.

  4. Hobbit _ | | #4

    Hmmph
    In these young idealistic times that much of RE is still in, none
    of us want to see the corporations walk in and eff everything up for
    their own gain. But to play at the level of Big Funding I suppose we'll
    have to accept a certain amount of that over time, as with everything eise,
    since the Dark Side is powerful. Regulation is probably a very key piece
    needed to keep that in check, which of course is the "R word" none of
    them want to hear about.

    This is *far* more charitable than my first gut reaction on reading
    this earlier today, which I managed to not post.

    _H*

  5. DAN VANDERMOLEN | | #5

    Finally peace in the Middel East
    Once green energy takes over and the developed world's oil money no longer is flowing into the Middle East than there will finally be peace in the Middle East or will it be the opposite? If the easy money from oil disappears do we really expect things to improve in these countries?

  6. User avater GBA Editor
    Martin Holladay | | #6

    Two approaches to addressing climate change
    Goldman Sachs is looking for ways to profit from investments in renewable energy -- and they will probably find a way to succeed at that goal, if history is any guide.

    It would be interesting to listen to the conversation that would result if the Pope entered the Goldman Sachs boardroom. Recently the Pope blamed climate change and the relentless destruction of the environment on "the reckless pursuit of profits."

  7. Malcolm Taylor | | #7

    Eric,
    Cheers!

  8. Randy Bunney | | #8

    Natural Capital
    The Nature Conservancy (TNC), the world's largest conservation organization. is run by a former Goldman Sachs investment manager Mark Tercek. TNC has diversified its approach to conservation around the world to include science-based initiatives that attract venture capitalists who invest in conservation projects with measurable outcome that return the investor's principal or perhaps even a low rate of return. Moreover, TNC has led in creative financial strategies to include water funds to address fresh water pollution. An early example isthe Magdalena River in South America, where down stream water users (such as municipal water utilities, bottlers, help fund restoration projects upstream that slow sediment inflow. Tactics include slowing clear cutting and introducing sustainable agricultural practices.

    Market forces are seen supplemental and not replacements for traditional conservation practices. Yet an emerging narrative shared a growing body of scientist, environmentalists, economists, social scientists and others understand that nature has economic value. For instance, nature is really good at helping defend coastal cities from storm surges through the combination of coral and oyster reefs, sea grass, mangrove coasts, and marshes. Economists are now seeking to assess the economic value of such natural defenses so that city decision makers can make informed choices when investing in hard or "grey" infrastructure and/or green infrastructure. For example restoring oysters beds costs approximately $1 million a mile but can spur economic growth.

    Whereas a cement sea wall starts deteriorating and loosing economic value from day one. Nature is not always the answer. However, properly managed natural coastal defenses not only contribute to resilient cities, by can also spur jobs in tourism and fishing.

    Rapidly depleting land resources are forcing humans to look to the sea for resources, particularly food. Some of the best thinkers in science and economy are working worldwide to assess the value of our oceans, fish, coral, and more with the idea that one has to measure what one wishes to save. Mapping our oceans' value is fundamental to what some point to as the blue economy of the future. http://blog.nature.org/conservancy/2015/05/28/mapping-ocean-wealth-informing-a-sustainable-ocean-economy/

    The way forward to saving the planet as we know it will necessarily require new thinking and diverse participation, including those companies whose only interest in natural capital is corporate profit. However, when we see that Cargill, one of the world's largest companies, has helped slow deforestation of the Amazon through sustainable and profitable soy bean farming, I am optimistic.

  9. Eric Habegger | | #9

    Randy, I understand that
    Randy, I understand that there are large corporate entities that are less detrimental to the planet than others. But we are talking about Goldman Sachs. If the closest link you can find to the Nature Conservancy is someone who was a former Goldman Sachs investment manager, well, good luck with that. Isn't it possible that the reason Mark Tercek joined the Nature Conservancy is because of the toxic "profit at any cost" culture of Goldman Sachs?

    It's notoriously hard to change corporate cultures. Your response to my reaction to the article seems to me to be the usual defense by diverting attention from the original issue. And the original issue is the title of this article "Goldman Sachs Is Our Best Bet Against Climate Change". I spent considerable time and attention watching the antics of Goldman Sachs in creating the real estate bubble through the financial derivatives they helped create. They knew full well they were creating a financial time bomb by subdividing individual real estate debt entities into two or more separate tranches of "good" and "bad" debt that was highly leveraged.

    They never received any significant financial or criminal prosecution penalties from that behavior. That's because they have so much financial clout they have bought our government representatives from both parties. Do you really think being an apologist for this kind of corporate culture, like this article reflects, is in the best interest of the Green Building Advisor?

  10. Peter L | | #10

    Why surprised?
    Money makes the world go around. It's the way it has been and the way it will continue to be. Nothing new under the sun. These statements & truths were made in the B.C. era. Money is power and power is money. Welcome to History 101

    This web forum we are posting on requires money to operate. They charge subscription fees. I see advertisement from Walt Disney to hair salons and everything in between posted all over the site. Many of the authors and contributors to this site charge speaking engagement fees. The point is nobody does anything for free. Everything has a price to it and green energy is no different. So even this site is part of a corporate culture. Nothing nefarious about it. It's just the way it is. People are bias and even scientists have personal agendas and bias. Welcome to Human Psychology 101

    Technology and change requires huge amounts of $$$. Studies and scientific research costs money. Change will not happen by a few people sitting around talking about it. It will require large amounts of cash and the infrastructure behind it.

    I'm not surprised that Goldman Sachs is involved. Tesla/Elon Musk required millions to make the innovations he has done and the SpaceX was over a billion. Any advancement that is taking place is being done by big time inventors and innovators and corporations. What idea might start in a basement will remain in a basement unless it gets the millions of dollars in funding it requires to become mainstream. That's the reality of it.

    So while some get on their high horse and condemn the "evil" corporations like Goldman Sachs. The reality is that GBA and everyone is part of the corporate culture. It requires money to operate, it charges fees, it posts advertisements, it has overhead which needs to be met by bringing in cash flow. In other words, it's a business, like any other business it requires money to operate. Welcome to Economics 101

  11. Eric Habegger | | #11

    There seems to be a basic
    There seems to be a basic misunderstanding why I'm upset about this article. There is nothing different between Goldman Sachs and the Enron behavior. The only difference is that the Enron executives were caught and prosecuted. If you think I'm calling out all corporations then you are uninformed. Get informed instead of generalizing Peter. The world is only unjust because people do not take the time to learn the specifics. They did a huge amount of damage through their actions. They are not like most other corporations you could name. Their apologists now would like them to have the potential to repeat the previous damage they did by recklessly creating arcane debt devices in the green industry that can later blow up.

    Even if it isn't a sure thing that they will do that why give them the benefit of the doubt and tout them as the savior of the planet.Instead of lumping all organizations together, like you would like to assume I'm doing, educate yourself on Goldman Sachs' record in creating the last mini depression. Can you do that. Peter?

  12. Malcolm Taylor | | #12

    Peter
    So if i understand correctly your argument boils down to: Sharks are fish. The ocean is full of fish. What's wrong with that?

  13. Norm Farwell | | #13

    Free market Kool-aid
    Thanks for that Eric. They should give you a guest blog.

    "If Internet-like growth is to be achieved, then we have reason to be optimistic about the future of our environment. Right now we may be at the stage with renewables of reading articles explaining what “www” means and why you can’t use a landline phone and the Internet at the same time."

    Or right now we may be at the stage of reading articles full of buzzwords and silly assumptions by people who can't admit the system itself is the problem.

  14. Eric Habegger | | #14

    the squeaky wheel
    Malcolm and Norm, thanks for the support. I'm afraid I serve better as the squeaky wheel that slows things down when I sense the old wagon (GBA) is taking a wrong turn. I think 95 percent of the time GBA and its guest blogs are excellent. So I'll squeak when it's necessary but most of the time I'll just enjoy the site like everyone else and keep my trap shut.

  15. Peter L | | #15

    Eric Habegger
    I am well versed in the economic collapse of 2007/2008 and this is not the place or time to debate the matter. If you think GS was solely behind the collapse then you need to get out more and actually research all sides to the story. It is not as simple as you think or just because you watched some film on Netflix about GS. It's a complex issue and many factors were at play. Conspiracy theories aside.

    Any change in the green movement is being made by large companies and sitting blogging on a web forum will not change that. Tesla, GS, Solar City, PHIUS, Panasonic, CISCO, etc. Progress is afoot and that is a good thing. Capitalism is not evil but people can be evil. It's been that way for a long, long time.

  16. Eric Habegger | | #16

    I thought of a new way to
    I thought of a new way to explain the logic of why I disagree with this article. Issuing debt instruments to large and small business and private entities is a natural part of any economic system. It is required for the proper functioning of that system. The basic role of any public or private issuer of that debt is to assess risk of that debtor to default. The "bank" manages that risk in various ways and they are allowed to make a profit based on that risk to the banks continuing survival. This is "real" economics 101.

    They are allowed to lay off that risk to other entities through various entities, such as insurance, arbitrage etc. What they are NOT allowed to do is to misrepresent the risk of that debt to the entities they lay that risk off to. But this is what Goldman Sachs did in 2007 and 2008 along with several other major NY firms. They took high risk individual debt instruments, basically home mortgages taken by people without jobs or without jobs sufficient to make the mortgage, and split them into two parts and then combined them with other high risk mortgages. Then these two collections of mortgages were assigned a high risk section and a low risk section. They did this by making the low risk tranche of these high risk mortgages have their payoff in preference to the high risk tranche of this overall high risk collection of mortgages. In other words, they "laid off" the risk to the buyers of these mortgages by convincing them that all the risk was already built into the pricing and payoff of these debt instruments.

    It would be like if a lemonade stand sold lemonade that was unsweetened. They would tell you ahead of time that you could pay 10 cents more to get a guarantee that it was sweetened or your money back. But in reality it was all unsweetened and in the meantime the lemonade stand took your money and ran. In the case of Goldman Sachs the "running" was done by the selling of the debt issues to people who just did not know the risks of issuing mortgages to people who couldn't make the mortgage payments.

    This is what caused the global financial meltdown in 2008. Bond holders where buying these issues from Goldman Sachs and several others without knowing that risk wasn't really laid off at all. As soon as the price of real estate started dropping and mortgage holders could no longer get rid it with a short term profit then the whole Ponzi scheme collapsed. I'm pretty sure that of all the major firms that Goldman Sachs was the only entity that paid no price at all for this negligent action. All the others either collapsed or had to be supported at government expense in order to stop a further contagion of the economy.

    So if you buy that Goldman Sachs is our best defense against global warming by issuing cheap debt, then you have learned nothing. And there will be many mortgages taken out throughout the world to green up our environment. The only problem is that most of the people, if history is consistent, will have been evicted from their green homes because they thought they could make a quick profit on the new "green home" craze.

  17. Eric Habegger | | #17

    I guess I should add that the
    I guess I should add that the only reason Goldman Sachs didn't collapse or have to be bought out was because at the last minute before the collapse they found some suckers, I mean customers, to buy the remaining debt issues from them. All the other firms that went under weren't so prescient.

  18. User avater GBA Editor
    Martin Holladay | | #18

    Valuable discussion
    It's nice to see another example of our GBA community in action, sharing viewpoints and debating.

    Needless to say, the guest blogs published on our site express a wide range of opinions. Opinions expressed in these guest blogs do not necessarily reflect the opinions of GBA.

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