Deals in climate-focused assets may be leaving money on the table. CREO Advisory says investors who paid “climate premia” rather than standard market prices could have earned much higher returns. The advisory group estimates net internal rates of return would have increased by as much as 7 percent under market pricing. The finding adds urgency to an ongoing debate about how to value decarbonization and resilience projects in a competitive market.
What CREO Found
“If deals had been struck at ‘market’ prices instead of climate premia, net IRRs could have been boosted by up to 7 percent,” says CREO Advisory.
The estimate points to a pricing gap in climate transactions. Investors are often willing to pay extra for assets with clear environmental benefits. That premium reflects policy momentum, corporate net-zero plans, and pressure from limited partners. CREO’s analysis suggests that the premium can be large enough to dent performance even when assets are high quality.
Why Climate Premia Persist
Several forces support higher pricing for green assets. Capital has flooded into energy transition strategies. Supply of mature, de-risked projects is tight. Many funds also need climate-labeled assets to meet mandates. These pressures can lift entry valuations.
Policy support adds another layer. Tax credits, grants, and contract structures reduce risk. That can make buyers comfortable paying more than comparable assets. But when too many dollars chase the same projects, expected returns fall.
Effects on Deals and Capital Allocation
Higher entry prices filter through the entire capital stack. Equity IRRs compress. Debt providers tighten terms as leverage increases. Secondary buyers then face thinner margins, which can limit liquidity.
- Premiums can raise payback periods and delay distributions.
- They can push managers to add leverage or pursue aggressive growth cases.
- They may steer capital away from early-stage or overlooked segments.
For asset owners, the question is whether climate premia reflect real strategic value or overenthusiasm. Some buyers argue that paying more today secures scarce platforms and long-term optionality. Others see a risk of overpaying for label value rather than durable cash flows.
Market Signals and Risk
Volatile power prices, rising rates, and inflation have already tested valuations. Projects that assumed flat financing costs or stable merchant prices face headwinds. If exit markets re-rate, premiums can vanish. That could leave investors with weaker multiples than planned.
Policy change is another risk. Incentives can shift with elections or budget cycles. Developers that rely on narrow rules may see returns swing if guidance changes. Buyers paying a premium must model downside cases and recovery paths.
How Investors Are Responding
Managers are adjusting investment playbooks to protect IRRs. Many are moving into earlier development stages where competition is lower. Others are forming partnerships that secure pipelines at fairer prices. Some are broadening scope to include efficiency, grid upgrades, or industrial decarbonization where valuations can be more reasonable.
Practices gaining traction include tighter underwriting, conservative exit multiples, and stronger operational plans. Managers also favor contracts that lock in cash flows and reduce exposure to commodity swings. The goal is to earn climate impact without overpaying for it.
What to Watch
CREO’s estimate will sharpen questions from investment committees and limited partners. Expect more scrutiny of entry multiples and underwriting assumptions. Funds may need to show how pricing aligns with risk, not just climate labels.
Key markers in the months ahead include deal flow in clean power, energy storage, and sustainable fuels. Watch for whether competition eases, and whether pricing normalizes as new projects come to market. Interest rate paths and policy updates will also guide valuations.
CREO’s message is direct: price discipline matters. Paying climate premia can erode performance even in high-impact assets. Investors who match climate goals with market pricing may find a better balance of return and impact.
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