Pension Funds, Endowments, and Foundation Portfolio Managers
Key Information & Criteria: Institutional portfolio managers – at pension funds, university endowments, foundations, family offices, or sovereign wealth funds – are the asset owners deciding whether to allocate a portion of the portfolio to climate tech. To treat climate tech as a dedicated allocation (e.g. 2% of the portfolio), they need information that addresses both fiduciary metrics (risk, return, correlation) and mission/impact metrics (for those with ESG or climate goals). Typical requirements include:
Risk-Return Profile and Benchmarks: Managers need to understand the expected return on climate tech investments relative to their risk. This involves historical data or proxies – for example, data on venture capital returns in climate tech funds versus general tech funds, or the performance of renewable infrastructure assets versus broader infrastructure indices. They will seek out benchmark indices or create internal benchmarks. (For instance, Cambridge Associates and PitchBook have tracked “cleantech” venture returns in the past; those showed that the first cleantech VC wave had subpar returns, which portfolio committees remember. Managers will want updated evidence that modern climate tech funds can meet target returns.) In 2024, climate tech represented roughly 8–10% of VC/PE investment flows, but the long-term IRRs are still being proven. Portfolio managers will likely request model portfolios or case studies showing that a 2% allocation to climate tech (spread across early-stage, growth, and infrastructure) could yield, say, an attractive blended return with diversification benefits. Essentially, they need to justify that climate tech fits within the portfolio’s risk budget – whether as part of the alternatives bucket or a new category.
Volatility and Liquidity Analysis: Information on the liquidity profile of climate tech investments (most will be in private markets with long lock-ups) is required. Pension funds, for example, might compare it to their private equity or real asset allocations, which also have low liquidity. They will analyze J-curve effects (slow returns early, potential high payoff later) similar to venture capital. They also need to gauge valuation uncertainty – climate tech involves emerging technologies that could be subject to hype cycles, so how volatile might valuations or exit prospects be? Any data on past drawdowns or failure rates in climate tech is useful. If not available, proxies from VC or infrastructure can be used. Risk managers may require scenario analyses: e.g. what happens to these investments under a carbon tax scenario vs. a status quo scenario.
Alignment with Investment Policy and Mission: Many endowments and foundations have sustainable investing mandates or at least are considering climate impact alongside financial return. Managers will gather information on how a climate tech allocation aligns with these mandates. This includes using taxonomy definitions (see standards below) to ensure the investments qualify as climate solutions. They may reference frameworks like the GIIN’s IRIS+ taxonomy for impact themes or the UN Sustainable Development Goals, to classify climate tech investments as contributing to Climate Action. For instance, if the institution has a target to reach net-zero by 2050 in its portfolio, managers will note that investing in climate tech solutions is both a hedge against transition risk and a way to drive real-world impact. They will still require metrics: e.g. projected CO2 emissions avoided per dollar invested, or the GRESB score of any infrastructure funds they invest in, to report on ESG outcomes. Thus, they often need impact data from fund managers (tonnes CO₂ reduced, clean energy generated, etc.) to satisfy internal or stakeholder reporting.
Manager Track Records & Pipeline: Since most institutions invest in climate tech via external fund managers or co-investments, they need information to perform due diligence on those managers. Key questions: Who are the specialist climate tech fund managers or generalist firms with climate-focused funds? What are their track records and team expertise? A pension fund IC (investment committee) will want to see that the selected managers have experience navigating the unique risks of climate tech. If climate tech is defined as a new asset class, the universe of investable opportunities should be mapped out. Portfolio managers will gather data on how big the pipeline is – e.g. number of viable climate tech startups or projects each year that could absorb their capital. They don’t want to create a 2% allocation only to find limited deal flow. Information from groups like Climate Tech VC (industry newsletters) or databases of climate startups can help illustrate the growing opportunity set.
Risk Profile (Early vs. Late Stage): Portfolio managers will differentiate early-stage climate tech (venture-type risk)vs. late-stage or asset-level climate investments (infrastructure-type risk). Early-stage climate tech is high risk/high reward – perhaps a 10x return potential but also a high loss rate, similar to venture capital. Growth-stage and infrastructure climate investments may offer steadier yields (like a solar farm yielding 8% or a battery leasing portfolio with contracted revenue). To institutionalize climate tech, managers often design a barbell strategy: a portion in venture-style funds (to capture innovation upside) and a portion in more mature climate assets (to provide yield and capital preservation). They will require information to model the combined risk. For example, an internal analysis might show that a 2% allocation composed of 1% in climate VC (estimated ~20%+ volatility) and 1% in climate infrastructure (estimated ~5–10% volatility) still keeps overall portfolio volatility within tolerance. They will also consider correlation: climate tech may have low correlation with traditional equities (especially the venture part), which is attractive for diversification. However, it could be correlated with certain commodities or policy events. So data or expert insights on how climate tech reacts to oil price changes, carbon price moves, or interest rate shifts are needed. Ultimately, institutional PMs need to articulate a strategic rationale: e.g. “Adding a dedicated climate tech allocation improves our portfolio’s long-term return potential and positions us for the low-carbon transition, without unduly increasing risk – the expected risk-adjusted return is comparable to other alternative assets.” To back such claims, they lean on both internal analysis and external frameworks (like climate scenario planning from TCFD, or consultant research).
