(Click here to subscribe to the new Delivering Alpha newsletter.)

Climate change has been one of the biggest topics of 2021, but private capital specifically, is still in a very nascent stage in making progress in this space. TPG’s Executive Chairman Jim Coulter is raising one of the very few climate funds in existence. Here he is on impact investing and the role of private capital in mitigating climate change risks. 

(The below has been edited for length and clarity.)

Leslie Picker: Where did this idea come from? You’re co-managing partner of The Rise Fund [which] does impact investing specifically. What gave [you] the idea of raising a climate-focused fund? 

Jim Coulter: Five years ago we began to look at the question of why impact investing hadn’t scaled and whether it might be next year’s idea to begin to focus capital to impact companies. Out of that came the Rise Fund which was the largest private equity fund focused on impact investing. One of the sectors we approached was climate. For a period of time, I have to admit, it was a little slow, because most climate investing was being done in the infrastructure market in contract renewables. But about two years ago, we noticed a fundamental change in the market for the quantity and quality of investments.

Picker: So where are we in this cycle? 

Coulter: I’ve been fascinated by the pattern recognition of what I experienced as a technology investor through the 90s and over the last 30 years and climate today. So it feels to me a bit like technology in 1998. It is a moment where society is beginning to realize that technology was going to touch everything just as climate is going to touch everything, and that the capital markets hadn’t quite set up for how they were going to deal with that. There were a few companies back in 1998 in technology, take AOL, which were famous.  But roll to the future, AOL is no longer what it was. Homepages are not driving technology today. So we sit today where there’s a realization that climate change will drive investing opportunities for perhaps decades to come, but the markets are still forming. 

Picker: So if AOL was kind of the darling of the late 90s, what do you think is the darling equivalent of the current stage for climate?  

Coulter: Well it’s clear in the public markets that Tesla, in some ways, is garnering attention — it may not end like AOL ended — but it’s an early understanding of the importance of one sector of the climate change universe. So EVs are a portion of what needs to happen. If you think about the climate change world in an emissions way, how we travel is probably only 18% of our emissions problem. And yet if you look at the amount of focus on climate-related companies, a huge amount of focus is in that one corner of the market. 

Picker: With the tech cycle, we did see a big boom and a big bust and people have kind of drawn out different elements of that as they look at areas like SPACs and some of the activity in the public markets like you mentioned. Do you see some of this recent frenzy and this rush to invest in these areas, similar to that part of the tech boom and bust cycle as well? And, you know, an extension of that is, does that indicate that the climate ecosystem could be in a bubble right now?

Coulter: I don’t see it as a bubble but I see it as what will clearly be a twisting and interesting journey. So I don’t want to draw too strong an analogy, but in some ways, it feels like 1998. If you remember back in 1998, people were understanding the immensity of what could happen. Every company was trying to come up with a tech strategy and capital began to flow into the area. So what happened? A number of companies jumped to the public market probably ahead of where they should have. A few of them didn’t find a very hospitable resting place there. Others, like Amazon, got to a public market early but took a long time before they really found their footing in the marketplace. So fast forward a few years, what happened after that moment? The market rewired itself and the growth equity market grew in the private marketplace. Companies like Uber and Airbnb stayed private for 10 or 12 years and I think we’re going to see the same pattern in this cycle, in the climate revolution, where there’s going to be a lot of excitement in the early days. Companies may jump in and react to the excitement, but a long term ecosystem of capital and capital solutions will grow and that’ll help the revolution unfold.

Picker: If the climate situation does see some sort of revaluation to the downside, is that detrimental to the movement toward climate change? Is that something that could cause investors to take a step back and say, “I’m going to, you know, sit on the sidelines for a little bit, wait for this to play out,” and then, what does that mean for climate change and the efforts to solve all these problems? 

Coulter: As markets react day-to-day, what drives long term returns are long term trends. So I don’t get very bothered by the day-to-day back-and-forth in this market. It’s absolutely clear to me, though, that the long term trend is developing. We’re not going back to a carbon-based world. The one thing that gives me some confidence on that is that there’s always a question as to whether green was an upmarket phenomenon and as soon as something went wrong, green would kind of fade away. We just went through a global pandemic, social upheaval, election uncertainty and we’re coming out of it with green more entrenched and with greater momentum. 

Picker: And why is that? People were really struggling last year and it was remarkable that so much attention was focused on how to improve the environment, climate change, just a real, huge difference in sentiment in a time that I wouldn’t have predicted that to happen. 

Coulter: I would have to say that COVID maybe was a moment where we understand that making nature angry at us, or that nature can surprise us in odd ways, has huge effects. So this was a moment that something we couldn’t control affected us all. And climate has some of those same attributes, where we had something that was going to take collective action and which will affect us all. It’s something that knows no boundaries, it knows no national containment, and therefore, maybe there was an awakening that has transferred some of its awareness over to climate. I also think that there was a moment within COVID where business and government came together against a problem: Operation Warp Speed and later the vaccine distribution, and that actually worked.

Picker: What’s the role of private capital here? How does that differ from all the other sources of capital that are looking to change this problem?  

Coulter: The private markets have a very important role to play, because we need to build the climate companies of tomorrow. And those companies are probably better built in the private market. And unlike what we just went through in technology, we’re going to require substantially more capital than a tech company to build. So, our goal is really to help play the role that venture capital played in the tech evolution, where venture capital had a really important role in giving birth to new companies that then went through growth equity into public markets. The same cycle needs to happen here where the private markets have to organize themselves to provide the capital to solve this problem.

— Ritika Shah, producer at CNBC, contributed to this article.