Renewable energy sparking big interest from institutions

Institutional investors are increasingly keen to invest in renewable energy, deciding that what's good for the planet may be equally good for a portfolio.

Sources in the pension fund, consulting and money management industries said renewable energy allocations continue to build on a strong 2014. Investments in renewable energy increased 17% globally to $270 billion in 2014 from the prior year, according to the Global Trends in Renewable Energy Investment 2015 report by the Frankfurt School UNEP Collaborating Centre for Climate & Sustainable Energy Finance. Direct institutional investment in European renewable energy projects alone hit a record $2.8 billion in 2014, up from $1.8 billion in 2013.

“As pressure to curtail emissions increases, there is a greater focus on the role that renewables and clean technologies can play in limiting climate change,” said Angana Jacob, London-based associate director, global research and design, at S&P Dow Jones Indices LLC. “The view of renewables as an investment is evident in the rising commitment by institutions to renewable energy projects and investments into green bonds.”

Investment is forecast to continue, particularly in the infrastructure space, although renewables can be found across private equity, real estate and other asset classes — and in Europe in particular. Research by Aquila Capital Concepts GmbH in October showed that, among 100 European institutional investors, 61% expect to increase exposure to renewable infrastructure over the next three years.

Other sources highlighted the fact that investors in continental Europe are further ahead than U.S. investors in terms of investing in renewables. One source said investors in Asia-Pacific and Canada are also ahead of the U.S.

“We are still seeing real appetite for institutional investors to invest into renewables,” said Duncan Hale, global head of infrastructure at Towers Watson & Co. in London. “It is more from a risk/return perspective, and also availability of deal flow, rather than a real focus on trying to do something that is fantastic for the planet - that is a side benefit.” Renewables have played a big part in infrastructure opportunities in the last 18 months, he added.

Mr. Hale said investors are becoming more sophisticated in terms of allocation to renewable energy.

“We are seeing a bifurcation of clients looking to generate high returns of building (projects) up, aggregating them and flipping the asset; and then those clients looking to own them over the long term, largely on an unlevered basis, and really wanting to enjoy the cash flow associated with those assets.”

Couple that with the past two weeks of discussions at the 2015 United Nations Climate Change Conference, known as COP21, and renewable energy is firmly on the agenda.

“One of the undoubted outcomes of COP21 is an increased focus on opportunities for investors across the renewable and clean-energy spectrum,” said Fiona Reynolds, London-based managing director at the Principles for Responsible Investment, a network of investors working to put six sustainability principles into practice. “We know all too well the risks around climate change, but now investors are paying increasing attention to the new investment doors that will open as the world transitions to a low-carbon environment.”

But uncertainties remain. “While the perception of this sector has improved among institutional investors over the past few years, it still faces several uncertainties in terms of continued private and governmental support as well as the price of oil — the lower oil prices fall, the harder it becomes for renewables to stay competitive, especially in the short term,” Ms. Jacob said.

In the past 12 months, asset owners have completed a number of allocations that specifically, or in part, target renewable assets, including:

• This month, the $71 billion Oregon Public Employees Retirement Fund, Salem, announced it will increase infrastructure and renewable energy investments with a new $400 million commitment.

• In October, a joint infrastructure venture between the £16 billion ($24.1 billion) Greater Manchester Pension Fund, Manchester, England, and the £4.6 billion London Pensions Fund Authority, London, made a commitment of £60 million to fund the construction and operation of British renewable energy assets.

nIn August, the NZ$30 billion ($19.6 billion) New Zealand Superannuation Fund, Auckland, announced a $75 million stake in Silicon Valley-based View Inc., a manufacturer of dynamic glass that controls natural light and thermal comfort.

• In December 2014, the $188 billion California State Teachers' Retirement System, West Sacramento, announced plans to more than double its clean energy and technology investments to $3.7 billion over the next five years, from $1.4 billion. A spokesman for CalSTRS said that while the fund does not chase targets and commitments will be made assuming suitable investment products are available, its latest Green Initiatives Task Force 2015 Annual Report showed the level of green and sustainable investment is now about $1.9 billion.

“CalSTRS does not imagine our progress will be linear,” the spokesman said in an e-mail. “We could see a slowdown of investments next year and maybe accelerated growth toward the end of the five years.”

“Some of our clients are expressing more interest in the risks and opportunities of investments in renewables and/or low carbon strategies; measuring their carbon exposure, querying external managers on material risks surrounding climate change; and, more broadly, considering the (Sustainability Accounting Standards Board's framework) to identify and standardize material sustainability (environmental, social, and governance) risks,” said Sarah Bernstein, Los Angeles-based principal at Pension Consulting Alliance LLC. The consultant's client base is predominantly U.S. public defined benefit funds.

In the last five years, “renewables has become a mainstream part of infrastructure investment and perhaps the leading source of infrastructure deal flow in North America and Europe,” said Alan Synnott, Dublin, Ireland-based head of the product strategist team for BlackRock Inc.'s infrastructure investment group. The firm has raised about $1.7 billion in equity assets devoted to renewables and $4 billion in infrastructure debt allocations — the majority of which include an allocation to renewables — over the past four years.

The attraction of renewable investment goes beyond helping to save the planet. “Renewable energy investments may help institutions improve the performance of their portfolios,” Ms. Jacob said. “Additionally, in this low-yield world, the stable cash flows of real assets compare favorably against traditional fixed income for institutions to meet their regular payment obligations.”

The political environment is also favorable as policymakers increasingly look toward institutional investors to supply long-term, low-cost capital to projects, she said.

As a growth-seeking asset, early-stage investment in renewables can provide potentially double-digit returns, said Hans Holmen, principal at Aon Hewitt in London. “Or it can potentially provide inflation-linked returns for liability-matching programs by investing in operational projects in stable regulatory environments.”

When choosing between investment in new or existing assets, “our preferred investment is through operational portfolios or projects. That way we can see the assets, how they have been performing, and risks pertaining to the assets around the energy yield. We can see a track record, and that takes a lot of the forecasting risk away,” said Mr. Holmen.

And regarding investment strategy, Tony Buscombe, partner and global head of infrastructure at Mercer Ltd. in London, said renewable energy interest has emerged as a subset of a broader allocation to infrastructure.

“We absolutely think renewable energy infrastructure can be an attractive investment, but critically, as forming part of a wider and well-diversified portfolio,” he said.

Given the size of allocations, their scale and resource constraints, most pension funds would invest via an external manager, rather than directly, he said.