Energy transition projects are gaining speed and luring investors

Most investors are focusing on the energy transition in some way. Nuveen's annual EQuilibrium Global Institutional Investor Survey released March 21 found that of the more than 800 global institutional investors overseeing $18 trillion in assets, a scant 7% did not plan to address it and a few contrarians were sticking with fossil fuels. Survey respondents included decision-makers at corporate as well as public pension funds, insurance companies, and endowments and foundations, as well as sovereign wealth funds and central banks.

On the flip side, 55% think they can “significantly influence” the energy transition’s rate of progress. More than half, 57%, already have or are seeking exposure to alternative energy, including renewables, nuclear and hydrogen power, and 51% want to allocate to new infrastructure projects, including new energy storage projects, grids and battery storage.

The rate of progress was mixed, with 9% considered first movers, 23% just getting started and 19% meeting regulatory requirements, the Nuveen survey found.

There were also big regional differences, with corporate pension funds in the Asia-Pacific region showing more interest in nature-based solutions while pension funds in Germany favored carbon credit markets, and North American public pensions leaned toward legacy infrastructure upgrades, Nuveen found.

The IEA projects a lot happening in the next five years. By 2028, nearly 3,700 gigawatts of new renewable capacity will come online, and renewable energy sources will account for more than 42% of global electricity generation. For context, one gigawatt is the equivalent of 1 billion watts. In 2023, new global annual renewable capacity reached nearly 510 gigawatts.

Solar photovoltaic and wind will make up 95% of that growth, thanks to supportive policy environments and their “improving economic attractiveness,” the IEA said, with new solar PV and onshore wind additions more than doubling in the United States, the European Union, India and Brazil by 2028. Meanwhile, wind and solar PV will generate more electricity than hydropower, coal and nuclear before then, it projected.

Other technologies including batteries, heat pumps and nuclear power have helped, but “solar is the star performer,” the IEA said, with more than $1 billion per day expected to have been invested in 2023, overtaking spending in upstream oil for the first time.

Ontario Teachers’ will keep investing in wind and solar, but also continue to explore a wide range of technologies, including energy storage solutions, hydrogen technology, advanced nuclear energy and renewable fuels, Ireland said.

For the $259.9 billion New York State Common Retirement Fund, Albany, roughly 70% of its sustainable investments program has a climate orientation — including renewable energy generation, transmission, distribution and storage — across seven asset classes: public and private equity, public and private debt, real estate, real assets and opportunistic. An initial goal of $20 billion recently was doubled to $40 billion invested by 2035.

For the $494.6 billion California Public Employees’ Retirement System, Sacramento, a plan to be net zero by 2030 calls for nearly doubling climate-solutions investments to $100 billion by 2030, with new investments across asset classes in climate control strategies and transitioning away from fossil fuels.

CalPERS officials caution that they could even underweight or exit an investment at some point if a company’s failure to present a credible net zero plan or invest in the energy transition poses a financial risk.

And it’s not just the biggest asset owners jumping in. In December, the $2.7 billion Stanislaus County Employees' Retirement Association, Modesto, Calif., committed $20 million to a renewable and sustainable energy non-core infrastructure fund managed by Carlyle Group.

“The demand for that capital is growing and higher than I have ever seen. We seem to be at a tipping point,” said Steven Porto, a partner with Ares Management Corp.’s infrastructure opportunities. “I think the story right now on climate infrastructure and energy transition is a story about capital and the cost of that capital,” said Porto, whose background includes clean energy development.

Ares, with $16 billion in infrastructure assets under management, takes development and scaleup risk but avoids the technology risk associated with first movers, Porto said. That approach has been steadily growing in related infrastructure, particularly in Europe where regulations and taxonomies are clear.

Offsetting the risks are inflation protection, yields and relatively stable returns, Porto said. “I think the story is going to be institutional investors allocating a higher percentage of their portfolios to climate infrastructure because of the value it provides.”

It is important to understand risk, said Coen Weddepohl, managing director at Schroders Greencoat’s North American renewable energy infrastructure group. Energy or climate transition strategies can be “a shiny new object in an institutional investor’s portfolio,” so investors should look beyond returns to understand where it fits in a portfolio and the risk factors associated with new technology and providers, he said.

The investment risk of climate change is also driving renewable investments at the Oregon Investment Council, Tigard, which oversees the $97.7 billion Oregon Public Employees Retirement System.

Aiming for a 60% emissions intensity reduction by 2035 for the entire portfolio, Oregon has more than doubled the amounts invested in renewable energy, including a tripling of those in real assets and private equity, and it dedicates at least 10% of active and 30% of passive public equities to companies geared to a clean energy transition, according to a report from Oregon Treasurer Tobias Reed.

Oregon will also “use our leverage as limited partners” to push for credible net-zero transition plans from private market investments that get more than 20% revenue from fossil-fuel activities. By 2035, it will expect real asset and private equity managers to have credible plans and will incorporate that into manager and fund selection processes, Reed said in the report.

Energy transition investments can also help to diversify portfolios impacted by geopolitical tensions, higher interest rates and market volatility, sources said.

In infrastructure, “the diversification benefits of this asset class are significant. The wind blows, the sun shines. It is less prone to commodity price cycles and recession. The demand for power is everlasting,” said Schroders Greencoat’s Weddepohl. “The opportunity window right now is the strongest we have seen in a decade.”

Collaboration between asset owners is likely, too. In January, the $331.4 billion California State Teachers' Retirement System, West Sacramento, was part of a $15 billion investment in Generate Capital's sustainable infrastructure platform along with Australian superannuation funds HESTA and AustralianSuper, government-owned Queensland Investment Corp. and others.

Sovereign wealth funds from Norway to Saudi Arabia are getting increasingly active in the energy transition as well, according to a survey released March 14 by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Fund Network.

The two groups heard from 40% of the world’s 95 sovereign wealth funds, which represented 90% of the roughly $7 trillion in total assets under management, and found that in 2023, 29% had a specific mandate to address climate change, more than double the previous year. The majority saw it as consistent with their investment mandate and 68% expected it to improve long-term returns.

While private equity is still the preferred asset class for addressing climate change, sovereign wealth funds are expanding beyond unlisted assets like private equity and real estate to listed markets, including fixed income and hedge funds, the survey found.

“We have seen the institutional investment community come from zero maybe 10 years ago to where we are now,” said Ed Levin who along with Thomas Emmons is managing director and co-head of direct infrastructure investments at Voya Investment Management, with $322 billion under management.

“We harbor optimism about this sector because it has grown over the last 20 years through various market cycles, administrations, lots and lots of regulations, and more,” Levin said.

“Investors just have to look at it, it’s so important,” Emmons added.

One “really important change” was the Inflation Reduction Act in the U.S., said Sean Klimczak, global head of Blackstone’s infrastructure group. The “IRA gave us 10 years of policy certainty. That allows us to take a longer-term view on large scale, transformative energy transition projects.”

Blackstone, with more than $1 trillion under management, addresses the energy transition through infrastructure investments that include utilities, wind and solar projects and contracted pipelines; credit funds that finance renewable projects; and its private equity energy transition business.

The energy transition is a growth industry for asset managers as well, with newly created positions continually popping up.

While Norges Bank Investment Management has invested in unlisted renewable energy infrastructure since 2020 on behalf of the 15.27 trillion Norwegian kroner ($1.48 trillion) Government Pension Fund Global, Oslo, it recently created the position of global head of unlisted renewable energy infrastructure.

A new role at Carlyle Group is chief strategy officer focusing on energy pathways, and TPG added the new position of partner and head of infrastructure for TPG Rise Climate, the firm's dedicated climate investing platform.

Ireland with Ontario Teachers’ advises institutional investors considering serious involvement in the infrastructure and renewable energy sector to have an investment team experienced in the sector.

Ontario Teachers started in the renewable sector 10 years ago because it recognized the potential for long-term value creation and mission alignment, Ireland said. “As a responsible investor, we are committed to deploying capital towards initiatives that not only generate financial returns but also contribute to positive environmental and social outcomes on a global scale.”

With just 29% of energy supply coming from renewables today, “There are a ton of tailwinds at the back of this industry. Decarbonization is a megatrend that’s not stopping,” said Blackstone’s Klimczak.

“Energy transition is not a light switch, it’s a dimmer switch. It’s something that’s going to happen over time.”