Frameworks for Defining Climate Tech as an Investable Asset Class
To bring climate tech into the mainstream as a dedicated asset class, stakeholders are developing frameworks that mirror those of established classes like real estate, venture capital, or infrastructure. Some recommended approaches and comparisons include:
Technology Readiness & Multi-Asset Approach: One framework segments climate tech opportunities by their technology readiness level (TRL) and assigns appropriate financing instruments to each stage. This approach recognizes that “climate tech” is not monolithic – it spans early R&D (which behaves like venture capital or even grant funding) all the way to mature deployments (which behave like infrastructure or private equity). By adopting a multi-asset class strategy, an institutional investor can cover the spectrum: e.g. use venture allocation for low-TRL high-risk bets, private equity for mid-TRL scale-ups, and infrastructure debt/equity for high-TRL deployments. This ensures a coherent cross-asset strategy where each climate investment is housed in the right bucket (rather than forcing a one-size-fits-all comparison). For instance, lower TRL projects (fusion energy startups) might be evaluated with metrics similar to biotech VC (high loss rate, high reward), whereas a portfolio of solar installations with battery storage can be evaluated like a core infrastructure fund (stable yields, asset-backed). The Columbia Climate Allocation Compass explicitly advocates matching TRLs to asset classes to accommodate the diverse risk/return profiles needed for decarbonization. This framework helps committees see that climate tech isn’t an outlier; rather, each piece can be mapped to something familiar (like treating a new green hydrogen plant akin to a project-financed chemical plant, albeit with some additional policy considerations).
Comparing to Real Estate/Infrastructure: Real estate became an institutional asset class when standards emerged for appraisals, indices (NCREIF), and risk metrics (cap rates, occupancy rates). Similarly, infrastructure investing matured with benchmarks and cash flow models (e.g. EDHEC Infrastructure Indices, GRESB Infrastructure scores). For climate tech, frameworks suggest developing analogous metrics. For example, an investor might evaluate a climate tech portfolio’s carbon-adjusted return, or use an **“Avoided Emissions” metric analogous to a yield, to compare different investments. One proposed concept is the Carbon Yield – tons of CO₂ avoided per $1000 invested – which could become a supplementary metric for climate investments (much as rental yield is for real estate). While financial return remains paramount, these new metrics help define the asset class’s unique value proposition. Additionally, risk mitigation structures in climate tech (e.g. contracts for difference ensuring a price floor for new tech outputs, or government off-take agreements for first plants) are being standardized, which makes them easier to underwrite just as standardized tenant leases support real estate underwriting. In effect, the framework is to make novel climate projects look as much as possible like traditional investments in terms of contracts and data, so that allocators can plug them into existing asset class models.
Blended Finance & Public-Private Partnership Models: Another framework acknowledges that to get climate tech to a core asset class, public and philanthropic capital often must pave the way (a concept known as catalytic capital). This is akin to how government often funds early infrastructure (roads, utilities) and then private capital takes over for ongoing investment. We see frameworks where a “stack” of capital is built for climate tech projects: first-loss tranches from mission-driven investors, mezzanine from development banks, and senior tranches from institutional investors. This is not a typical approach in other asset classes, but for climate tech it may be interim necessary architecture. The information requirement here is clear delineation of risk layers and return expectations for each. Institutional investors can then allocate to the portion matching their mandate (usually the de-risked senior layers) while still contributing to the overall financing. Over time, as climate tech proves out, the need for heavy public co-investment should wane, and the asset class stands on its own. Frameworks like the Climate Finance Leadership Initiative (CFLI) emphasize such partnerships to mobilize private capital at scale, treating public incentives and guarantees as a bridge until climate tech has a long track record.
Asset Classification and Governance: A practical aspect of defining any new asset class is determining how it’s governed internally. Some institutions have created dedicated climate or impact investment teams that span asset classes, ensuring the focus and expertise. Others slot climate tech deals into existing teams (e.g. infrastructure team handles renewable projects, VC team handles climate startups). A recommended practice is to establish a Climate Investment Committee or sub-committee that develops an overarching strategy and ensures knowledge sharing between venture, credit, and infrastructure specialists. This mirrors what some large insurers have done by creating “climate transition portfolios” cutting across fixed income and equity. The framework should outline investment guidelines specific to climate tech – for example, concentration limits (not too much in one technology type), minimum ESG safeguards (no solutions that cause unintended harm), and criteria for what qualifies (to avoid greenwashing, perhaps require each investment to demonstrate a measurable climate benefit). These guidelines make the asset class real in an institutional context, similar to how real estate teams have guidelines on property types or geographies.
In summary, frameworks for climate tech investing borrow elements from multiple traditional asset classes and add climate-specific lenses. They encourage a flexible, multi-asset view – recognizing that achieving portfolio exposure to climate solutions may require investing via venture and infrastructure vehicles – while developing common standards to evaluate performance. Over time, as more data on climate tech investment outcomes becomes available, these frameworks will solidify, complete with benchmark indices and rating systems (we’re already seeing moves toward “climate impact scores” and specialized indices). The goal is that an institutional investor in the 2030s can treat climate tech just as they treat, say, private equity: with decades of historical benchmarks, defined sub-strategies, and a clear place in the portfolio’s risk/return spectrum.
