PG&E may be the first company bankrupted by climate change, but it’s unlikely to be the last. Acting in its own self-interest, the state of California recently began to try to keep bankrupt Pacific Gas & Electric as a going concern, so this story continues to play out.

Today, many leading institutional investors, such as GMO founder Jeremy Grantham, think that many compelling investment opportunities are going to surface in the next two decades thanks to climate change. But there are likely to be lots of losers as well as winners.

PG&E’s failure underscores some of the perplexing problems facing the emerging ESG investing universe. Like fellow environmental bad boy BP, PG&E received high marks from a number of ESG ratings services and showed up in the portfolios of many funds that used ESG screens to select their portfolio holdings.

With numerous ratings agencies and data providers scoring companies based on their ESG merits, the PG&E experience illustrates how challenging the task of evaluating companies by these metrics can be. PG&E had major investments in solar, wind and other renewables. However, when one looked under the hood, a different picture emerged, according to Lori Keith, portfolio manager of the Parnassus Mid-Cap fund.

For years, the warning signs on PG&E were right beneath the purportedly clean, green surface, she said. "We had significant safety concerns,” Keith said. The giant utility had a long track record of fires, a pipeline explosion, lawsuits with contractors and poor employee relations. Virtually no long-term incentives for senior management were tied to customer satisfaction or employee safety.

A growing number of investment managers are starting to view climate change and decarbonization as huge opportunities over the next two decades. Take Todd Hedtke, chief investment officer of Allianz North America, who oversees $20 billion in assets, the majority of which is invested to meet long-term liabilities arising from annuities and life insurance policies.

Allianz also sells property and casualty insurance (with shorter term liabilities), but the financial giant’s property and casualty business is much bigger in Europe than in America. Nowhere are weather and environmental issues a bigger problem than in this business.

For insurers, climate change is THE ISSUE in the P&C and reinsurance worlds. The bill from the recent wave of wildfires, hurricanes, floods and droughts that have mushroomed in recent years is adding up. And no one knows what the ultimate bill will be.

Allianz recently conducted a survey that found most Americans wanted to invest in companies with sound environmental (73 percent) and governance (69 percent) practices. However, as many as 85 percent worried that placing their values first could hurt returns.

This surprised Hedtke. The idea that “quality in workplace and environmental issues won’t help determine winners and losers over the long-term is mistaken,” he said.

Hedtke acknowledged that many ESG issues aren’t going to influence the stock price for many companies in the next six to 12 months. But it’s “a function of [one’s] time horizon,” he added. If most investors may not have the 20- or 30-year horizon of an insurance company, they should at least be looking out several years.

Estimating the size of this ESG market is a daunting task. At a press luncheon earlier this month, Loomis Sayles portfolio manager Dave Rolley predicted that the transition away from carbon would require $100 trillion worth of funding. He noted that politicians aren’t “very good at anticipating problems,” adding it would take some new disaster worse than the Puerto Rico and Katrina hurricanes to make decarbonization a priority. There will have to be a “Pearl Harbor moment” that awakes a slumbering public and political establishment.

How does Rolley get to the $100 trillion figure? He cites a 2017 OECD study arguing that decarbonization will require "a $3.5 trillion per year energy investment requirement, and totalled over the period 2020-2050 this gives about $100 trillion.  This includes both conventional and non-conventional energy investment, ie, gross energy investment over the period, with the assumption that meeting the 2 degree C heat increase limit would see a dramatic and continuing shift to low carbon generation over the period, including 90% of electricity and 70% of the world car fleet converted to electrics.  Separating out the pure "low carbon" element would require estimating both the new, ie, incremental expenditure plus the shift from old to new generation sources over the period."

Rolley also interprets the study as implying oil and other fossil fuels are going to be around for a long time. "They [OECD] also stated that Co2 emissions would have to peak by 2020, or next year.  We are going to miss that by a lot, it looks like, so the transition costs  are probably going to be much higher in consequence."

In a recent shareholder letter, GMO’s Grantham and Lucas White cited experts who project investment in renewables alone will approach $2 trillion per year by 2050. Grantham and White also made the case that the climate change sector is “likely to be relatively inefficient” from an investment standpoint, thus creating “opportunities to add significant value.”

They noted that hedge fund investors typically “accept low returns, high fees and illiquidity in the quest for uncorrelated returns.” Unlike hedge fund investors, Grantham and White maintained, climate change investors will be able to “enjoy the beneifts of diversification without making such sacrifices.”

The GMO managers cited the conclusions of the Trump administration’s Fourth National Climate Assessment that climate change is expected to cause substantial “damage to the U.S. economy throughout this century.” That means there will be a high demand for products and services focused on mitigating global warming.

“Green energy industries, however, will uniquely benefit from increased government intervention, not to mention ever-improving technologies,” White and Grantham continued.

What about the issue, uncovered in the Allianz survey, of foregoing returns from investing in traditional, fossil fuels-based energy? White and Grantham, who began his career as an economist at Royal Dutch Shell, addressed these concerns head-on.

They acknowledged that “old” energy companies have outperformed the broad equity market and provided “inflation protection and diversification,” particularly during decade-long periods like the 1970s and the so-called Lost Decade from 2000 to 2010. In both those periods, “oil and gas companies were up well over 100 percent in real terms with the S&P 500 down,” they said.

Grantham and White argued that investors can “maintain that exposure to traditional energy prices” when investing in clean energy solutions. Why? Because when fossil fuel prices rises, clean energy becomes that much more competitive.

If only picking the winners and losers were as easy as that.

But one area that is certain to enjoy sustained growth are the data analysis that track, rate and score companies on the basis of various ESG factors. Hedtke says he is a major consumer of these services.

While trying to estimate the impact of climate change is important to investors, quantifying the potential damage from disasters is a life-and-death issue for P&C insurers. In the P&C insurance consulting business, cmpanies that specialize in helping carriers measure potential damages is a high-growth business, Keith noted.