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.”