Billionaires Versus Big Oil

Peak Oil and Earth Day and the Environmental Protection Agency are all very nice. They have played their part in changing global perceptions - if not all that much behavior - about energy usage.

But it has always been clear that the only factor that would really force a recalibration in the universal approach to oil and gas was if really, really rich people believed they could make a lot of money from alternative energy sources and began investing to secure that return.

That moment is now here. JL

Brian Dumaine reports in Fortune:

A growing number of the world’s wealthiest people, from both ends of the political spectrum, are banding together to bet on new technologies that could displace fossil fuels. The one thing they have in common? They believe it will make them a lot of money.

Ward McNally never intended to become a booster for clean tech. The great-great-great-grandson of the founder of the 159-year-old Rand ­McNally map company, he helped sell the family business in 1997. ­McNally, 43, is now the co-founder and managing partner of McNally Capital, a Chicago firm that advises wealthy families on their private equity investments. His focus is making money, not being green.

But one day in 2010 a billionaire client who’d made his fortune in oil came to McNally with a problem. The client had invested in a clean-tech company to hedge his family’s core source of wealth: fossil fuels. “We started talking about clean tech,” recalls McNally, “and although he thought it was a great investing opportunity, he complained about how complicated it would be for his family to enter the space.” The billionaire lamented that he lacked the depth of knowledge to make sophisticated investment decisions about deals in areas like smart-grid infrastructure and solar and wind power, and he didn’t want to take the time and incur the expense to build his own large team of professionals. The client asked what could be done. And that’s when McNally suddenly had a big idea. “I thought,” he says, “why not build a network of billionaire clean-tech investors who could share knowledge, share capital, and share deals to achieve their goals?”

A few months after that meeting, McNally created the Clean Tech Syndicate. The Chicago-based investment group now consists of a pool of 11 family offices—including the oil billionaire’s—that wish to invest in the clean-tech space. In total, the families have a net worth of some $60 billion. So far the syndicate has pledged to invest $1.4 billion in clean tech, and McNally says it has already put “hundreds of millions” to work. What he won’t divulge is the identity of the 11 families behind the syndicate. Like many in the 1% of the 1%, the members jealously guard their privacy.

Ward McNally created the Clean Tech Syndicate after one of his wealthy private equity clients began asking for advice on how to put money into next-generation technologies.Photograph by Peter Wynn Thompson—The New York Times/Redux

The existence of the Clean Tech Syndicate is just one example of an important, emerging trend in the world of energy fi­nance: America’s ultrawealthy class has begun to put its money to work in clean tech in a big, big way. Some of these billionaires feel duty­-bound to use their fortunes to combat climate change. Others are putting money in mainly because they see it as one of the biggest investment opportunities of the 21st century. Some do it for both reasons. Whatever the motivation, they all expect to make a healthy profit. Says Nicole Schuetz, who conducted one of the rare studies on the topic for the nonprofit Energy Innovation: “Every family office I spoke to expects to make competitive or above-market returns. They are protecting their wealth for future generations.”

Who exactly are these super-deep-pocketed investors? No definitive list exists, but months of reporting by Fortune turned up plenty of interesting names. Nicholas Pritzker, whose family made billions building the Hyatt Hotel chain and who is personally worth $1.5 billion, is an active clean-tech investor. Through his Tao Capital Partners, Pritzker has made early investments in Tesla Motors and Solar City. Amway heir Dick DeVos, a rock-ribbed Republican, has put money into a company that seeks to convert energy from waste into electricity. In addition to McNally’s group, another large network of wealthy clean-tech investors is a group called Cleantech, Renewable Energy, and Environmental Opportunities (CREO), which brings together some 50 family offices with a total of $50 billion in investable capital. The organization holds regular off-the-­record meetings to discuss opportunities in clean tech as well as in areas such as wastewater, wetlands restoration, carbon credits, and sustainable agriculture. Billionaire investor Jeremy Grantham and eBay co-founder Jeff Skoll, who was a producer of Al Gore’s documentary, An Inconvenient Truth, have sent their representatives to meetings.

Investment in clean energy by the ultrarich is not unprecedented. For years a handful of high-profile activists fighting climate change, such as Bill Gates, George Soros, Richard Branson, former New York City mayor Michael Bloomberg, and Tom Steyer, a billionaire hedge fund manager, have been supporting the clean-energy cause mostly through their philanthropies. They have also invested for their own book on occasion. (The most famous example is Gates’ backing of ­TerraPower, which is attempting to create a new, safer generation of nuclear power plants.)

What’s new is that a small but growing number of behind-the-scenes billionaires are now pouring serious money into clean-tech companies and projects in pursuit of profit—all part of a big bet that the world will transition to a low-carbon economy in coming years.

“The families in the syndicate,” says McNally of his clients, “see clean tech as a macro-driven thesis that includes water scarcity, clean air in China and India, and the need to reduce energy consumption because of a growing population.” When you read about severe droughts in the American West or a falling water table in China, why not invest in nanotech filters that promise to clean wastewater, or in energy-efficient ways to desalinate our oceans? Many energy-related industries, including utilities, automotive, lighting, water, and food, are ripe for similar technological disruption. “These new clean-tech markets are some of the fastest growing in the U.S.,” says Adam Wolfensohn, the son of former World Bank president and investor James Wolfensohn, whose family office is part of the CREO network, “and will leapfrog the old economy.”

Powerful forces are skeptical of that feel-good narrative, however. In the U.S., conservative politicians have accused some of these well-heeled investors of living off clean-tech subsidies from their friends in the Obama administration. Last summer the Senate Environment and Public Works Committee, chaired by noted climate-change denier James Inhofe (R-Okla.), issued a 67-page report called “The Chain of Environmental Command: How a Club of Billionaires and Their Foundations Control the Environmental Movement and Obama’s EPA.” Among Inhofe’s campaign contributors are the brothers Charles and David Koch, who run Koch Industries and whose vast fortunes were built on fossil fuels. The New York Times reported that they will spend nearly $889 million trying to defeat Democratic candidates in the next election—in the process supporting politicians who they believe will protect the status quo.

Big Oil doesn’t appear eager for an energy revolution either. The industry embraces clean energy in its marketing campaigns but at the same time downplays its potential impact, arguing that solar, wind, and other clean technologies will take many decades to scale, if they ever do. The perspective of oil company CEOs can’t help but be influenced by the daunting calculus of the energy economy. An estimated $27 trillion of fossil fuels remains buried in the ground. And if the world is to meet its climate goals, according to the scientific community, most of that black gold will have to stay there. Exxon Mobil, Chevron, and Shell—not to mention the Saudis and the Russians—seem unlikely to want to leave that kind of money on the table.

If the world is going to move away from a fossil-fuel economy in time to slow the effects of global warming, billionaire investors will need to play a key role.

Click to enlarge.Photographs by from left: David Paul Morris—Bloomberg via getty images; Julien Warnand—EPA/Corbis; Mario Tama—Getty Images; Courtesy of Sea Change Foundation; Tony Cenicola—The New York Times/Redux; Steve Jennings—Getty Images; Scott Eells—Bloomberg via Getty Images; Rex Larsen—AP

The surge of interest in clean tech by wealthy individuals and families comes even as some professional investors are turning away from the sector. Many venture capitalists and institutional investors have become wary of clean tech because of its long investing horizons and deep need for capital. In the U.S. total VC spending on clean tech fell from a peak of $4.3 billion in 2011 to $2 billion last year, according to the consultancy PWC.

Wealthy family offices are perfectly positioned to fill that gap. And they aren’t scared off by the long-term commitment. In fact, the opposite is true. “Many families, including ours, make clean-tech investments because there are tremendous opportunities in this space for investors with sufficiently long time horizons,” says Nat Simons, whose father, James Simons, founded hedge fund Renaissance Technologies and accumulated a net worth of $14 billion. Today the younger Simons, who is deeply concerned by climate change, invests family money through his San Francisco investment fund Prelude Ventures—but always, he says, with a sharp eye on the bottom line.

No one knows exactly how much money family offices are sinking into clean tech. But we do know that clean-tech investing is on the rise globally. J.P. Morgan and the nonprofit Global Impact Investing Network (GIIN) recently issued a report showing that 125 global-impact investors—including funds and endowments that put money into clean tech, sustainable food, and other forms of socially responsible investing—planned to increase their investing commitments by $12.7 billion in 2014, up 19% from the year before. Collectively the investors have put $46 billion to work. Family offices represent a small portion of that total.

A healthy share of such money is being used as venture capital. Rob Day, who runs the Boston operation of Black Coral Capital, a family office that helped found the Clean Tech Syndicate, estimates that in the U.S. last year family investment funds supplied as much seed money as the established VC players such as Kleiner Perkins, DBL Investors, and Rockport Capital. “Family investors have grown fatigued with paying 2% of their assets and 20% of their profits to venture capital firms and hedge funds,” says Day, “so they’re investing in clean tech directly on their own.”

Geoff Chapin, the founder and CEO of Next Step Living, a Boston-based solar and energy-efficiency startup, can testify to the benefits of having billionaire VCs get interested in your technology. Chapin had angel funding, but his company really didn’t start scaling until Black Coral decided to fund its Series A round in 2010. After that, the family office became heavily involved in helping the company succeed. “Black Coral introduced us to 30 more potential investors, helped us raise a total of $70 million, and guided us on governance issues,” says Chapin. Other family offices later followed Black Coral in putting money into Chapin’s company, including Eastern Sun Capital Partners, backed by billionaire investor Jeremy Grantham. In 2014, Next Step Living hit $100 million in sales, up 70% from the previous year.

Clean-tech investing generally falls into two broad categories. There’s venture capital, which provides the seed money for risky startups. And then there’s project financing, which provides the cash for huge projects such as utility-scale wind and solar farms, water-desalination plants, and energy-efficiency projects.

Spending on project finance dwarfs the dollars put into venture capital and is considered a less risky investment. Last year, according to Bloomberg New Energy Finance, some $264 billion was invested globally in clean tech, the vast majority via project financing. That total sounds impressive until you learn that the International Energy Agency estimates that we need to invest $1 trillion a year if we are to decarbonize the economy fast enough to mitigate the worst effects of climate change. That target is known as the “clean trillion.”

Family offices can’t make up all of that gap, but they can help fill it. “There’s a mismatch between VC funding and the capital-intensive needs of energy technology,” says Nicholas Eisen­berger, managing partner of the strategic advisory firm Pure Energy Partners and a co-founder of CREO. “You’ve got to get to scale to have any impact, and families play an important role in filling that gap.” In total, single-family offices hold an estimated $1.2 trillion in assets, and multifamily offices manage another $500 billion, according to the consulting firm Family Wealth Alliance. Only a small fraction of that goes into clean tech right now, but the figure is growing, say experts. The appeal is that by providing project financing to big solar and wind projects, investors can reap a healthy 10% to 15% annual return without an inordinate amount of risk. That’s because, for example, solar and wind farms secure long-term agreements—typically 20 years—with utilities to buy their power.

But finding the right projects and getting them off the ground can be tricky. Says Dan Reicher, the executive director of Stanford’s Steyer-Taylor Center for Energy Policy and Finance, which was funded by billionaire fund manager Steyer: “There are lots of opportunities to do well and to do good, but also a lot of ways to make mistakes.” Raising development capital for a large solar or wind project, he explains, is not a simple matter. “You might need $20 million or $30 million just to get a project on the road and then $1 billion more to finance it,” says Reicher.

Family offices are about to get a big boost from the Obama administration, which in February announced that the Department of Energy will provide support and access to federal clean-tech R&D to a broad range of private investors and philanthropists. The aim of the program, called the Clean ­Energy Investment Initiative, is to help wealthy investors mobilize $2 billion in new clean-tech investments.

Despite the growing number of well-heeled clean-tech investors, making a dent in climate change remains a steep challenge. According to the UN’s Intergovernmental Panel on Climate Change (IPCC), the world’s known remaining supply of oil, gas, and coal would, if burned, generate 3,863 gigatons of carbon dioxide, the most prevalent greenhouse gas. To put that in perspective, we’ve already emitted about 580 gigatons of CO₂ over the past 150 years to power the Industrial Age. If we are to avoid the worst consequences of climate change—which means the planet cannot warm any more than 2° C this century—the world can use up only about a third of its proven fuel reserves by 2050. This is what industry analysts refer to as stranded assets. At the rate we’re currently burning fossil fuels, we’ll burn through our budget well before that.

What does that mean for the fossil fuel industry? The non-profit Carbon Tracker Initiative estimated in a recent study that the market value of the top 100 public oil and gas companies and the top 100 public coal companies exceeds $7 trillion, equal to about 12% of the global public equity market. Add in the assets of state-owned energy companies such as Saudi Aramco, PetroChina, and Russian’s Rosneft, and the total global market value of proven fossil-fuel reserves hits $27 trillion. If the IPCC is right and two-thirds of the world’s supply of fossil fuels must stay in the ground, that would amount to a staggering $18 trillion write-off.

Big Oil doesn’t see it happening. Exxon Mobil, which employs an army of smart analysts to study energy demand, says that by 2040 the world will still depend on fossil fuels for 75% of its energy needs. What these oil-industry analysts understand and many others don’t is just how vast our energy system has grown and how addicted the world has become to cheap, dependable energy. Globally we burn 93 million barrels of oil a day, and demand for coal continues to grow in the developing world. China, India, and other emerging economies are installing coal plants because they provide cheap, dependable energy that can help lift people out of poverty. The World Resources Institute says that roughly 1,200 more coal plants are still on the drawing board, almost all of them in the developing world.

So far renewables have been dwarfed by fossil fuels. Solar and wind together, for example, count for less than 5% of total U.S. electrical generation, and advanced biofuels a negligible portion of transportation fuel. In a recent speech Shell CEO Ben van Beurden argued that rising energy demand—especially in China and India—will keep the oil companies in business for a long time: “The ‘stranded assets’ thesis underestimates the significance of rising energy demand. It underplays the role natural gas will perform in the global energy system—especially in replacing coal power plants. And it ignores the potential of innovations like carbon capture and storage.”

In the political realm, conservatives who back the fossil-fuel industry argue that technologies such as solar and wind are more expensive than coal and natural gas, and are therefore job killers. You simply can’t grow the economy, they say, without producing lots more carbon. But in 2014 global GDP grew 3%, while carbon dioxide emissions flatlined, after rising 2.5% the year before, according to the International Energy Agency. Some of that CO₂ reduction was caused by slowing economies in Europe and China. A great deal of it, though, was due to a record amount of solar and wind installed globally, a rise in automotive gas-mileage performance, and aggressive energy-efficiency programs—all evidence that it’s possible to stimulate economic growth without increasing pollution.

A worker installs a photovoltaic panel at a First Solar site in California. First Solar’s early investors include members of the ultrawealthy Walton familyPhotograph by Sam Hodgson—Bloomberg/Getty Images

Many wealthy investors who are concerned about climate change believe that the fossil-fuel industry and its political backers are on the wrong side of history, and that the crucial $18 trillion in fossil fuels are destined to become stranded assets. Says one green billionaire who is actively investing in clean tech: “The fossil-fuel interests are trying to marginalize us, and we can’t let that happen.”

What makes these investors confident that they can take on Big Oil? Shifting political winds for one. Of late, many nations are finally getting serious about limiting carbon. Witness the agreement last fall between President Obama and China’s President Xi to reduce greenhouse-gas emissions. In December, 196 countries will gather in Paris prepared to sign a new climate-change agreement to replace the Kyoto Protocol. While the tougher new CO₂ standards will be voluntary, the mere existence of a new agreement that will include the U.S. and China, the world’s two biggest emitters of CO₂, suggests that the international community is getting religion on global warming.

In the U.S., Congress has done little on climate change, but the Obama administration, using its executive power, has dramatically raised vehicle mileage standards and is set to place strict CO₂ emissions limits on the nation’s 580 coal-fired plants. Action is taking place on the state level as well, including Gov. Jerry Brown’s recent pledge to make California’s power sector 50% renewable by 2030, up from around 20% today.

At the same time, some institutional money is starting to have second thoughts about investing in fossil fuels. The Rockefeller Brothers Fund and Stanford University are divesting from coal, and city and state pension funds might not be too far behind. The small amounts divested so far are unlikely to have any serious short-term impact on Big Oil or Big Coal, but the popularity of the divestiture movement is a reflection of a growing anti-fossil-fuel sentiment—especially among millennials, who feel, rightly, that the baby boomers are leaving them a climate in crisis.

Perhaps more threatening to the fossil-fuel industry are campaigns by environmental groups such as the Rainforest Action Network to put pressure on banks not to lend to companies that worsen global warming or defile the environment. In March, PNC Financial, the nation’s seventh-largest bank, said it would no longer finance coal-mining companies that pursue mountaintop removal of coal in Appalachia. Bank of America, Citigroup, Morgan Stanley, J.P. Morgan Chase, Wells Fargo, Credit Suisse, and others have already started to phase out their financing of mountaintop coal-mining companies. When climate-minded investors such as Stanford University divest coal stocks, someone else who doesn’t care about global warming will just buy the shares. But when banks refuse to finance projects, it can pose an existential threat to an industry.

The only way for concerned billionaires to prove the entrenched powers wrong will be to ramp up investments in clean-energy technologies that have the potential to rival fossil fuels in cheapness and efficiency—a tall order. Another thing that might help is for more ultra-deep-pocketed investors to simply step out of the shadows and let the world know what they’re doing and why. If word spreads that the world’s wealthiest people are planning to get even richer by investing in clean energy, the idea might really catch on.