Billions of dollars are available for green investment as the world tries to control greenhouse gas emissions from the energy sector, but finding the best bet is a challenge because the energy transition is moving so fast, private equity managers and investment bankers said.
As panelists staked out their top choices for green investments March 9 at the CERAWeek by S&P Global energy conference in Houston, renewable natural gas emerged as a particularly divisive option.
Renewable natural gas — a fossil gas alternative processed from methane waste at farms, landfills and other sources — offers the most immediate carbon reduction for the least cost, according to Steve Pattyn, founder and chief investment officer of Yaupon Capital Management LP. By contrast, BeyondNetZero Managing Director Rhea Hamilton sees energy efficiency as "the biggest bang for the buck," with additional potential in emerging investing in carbon markets.
But considerations beyond carbon cuts and cost will also come into play, HPS Investment Partners LLC Managing Director Don Dimitrievich said. There is not enough renewable gas to cover an appreciable portion of the demand market nor do producers have the ability to grow quickly, Dimitrievich said.
"That investment isn't scalable," Dimitrievich said.
Disruption awaits
The money managers described "green swans" that could influence the energy transition — a riff on black swan theory, which holds that unexpected factors or events can have large impacts on society. These forces ranged from Russian military action to technological advances, the money managers said.
"The green swan is the ingenuity of everyone in the industry," Pattyn said. "At any given time, with the information I had, I would have made a set of conclusions that led me to dramatically wrong investments.
"What I needed to be focused on was how quickly things were changing and how the men and women of the industry would react," Pattyn said.
Dimitrievich cited Russia's recent invasion of Ukraine as an example of an event that can have cascading impacts. "High oil prices, high transportation prices will invariably have to serve as a catalyst to decarbonize and electrify the energy system," Dimitrievich said.
The extra cash flow that oil and gas producers are receiving thanks to elevated commodity prices could increasingly fund alternative projects in Europe and in hydrogen, said Scott Roose, Credit Suisse managing director and global head of environmental, social and governance investing.
Dollars in action
BeyondNetZero's most recent investments included support for a company that is digitizing the handling of waste and another building vertical farms. One of BeyondNetZero's missions is to bring global industries back to local economies.
HPS provides growth capital to established companies. It is heavily invested in utility-scale solar power and battery storage. Pattyn described Yaupon Capital's portfolio as "short crude oil, long Lucid," referring to electric vehicle manufacturer Lucid Group Inc.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.
