Renewables investors must up their game

The renewable energy market is evolving, and investors and asset managers must adapt.

This year may be the one when the world wakes up to the climate emergency. Bold action is required, and never has investment in the energy transition been more pressing.

We have seen growing momentum here, with renewables making up an ever-greater share of generation capacity. And as renewable energy moves away from “niche” status, the way it is funded will change. Crucially, this will require an evolution in the way the private investment community considers these assets.

Institutional investors clearly recognise the key role they can play in tackling climate change through investment in renewables. New research from Octopus among 100 institutional investors – representing $5.9 trillion of assets under management – has shown that almost three-quarters believe they can make a material difference through their investment strategies.

Divestment from fossil fuels is the most popular way to take a greener approach, with investors planning to divest £920 billion from fossil fuels over the next decade – almost tripling outflows planned for next year. But divestment alone is not enough. Investors need to get behind the energy transition and proactively invest in climate-saving assets such as renewables if they want to mitigate the climate crisis.

As governments across the world set increasingly ambitious net zero emissions targets, the investment case for renewable assets is strengthening, and we are seeing increasing demand for low and no carbon energy. Alongside this, awareness that the asset class can generate long-term, stable returns for investors is growing. This is clear from the survey’s findings, which show that institutional investors plan to invest $643 billion into renewable energy infrastructure over the next decade.

While this is a step in the right direction, we want to see greater consideration given to renewables, as many institutions are still missing out. Our research found that 16 per cent of institutions had no allocation to climate-saving sectors at all, accounting for around $1 trillion assets under management in our sample alone.

In order to meet the targets of the Paris Agreement to limit global warming to well below the 2C mark, more investment is needed in renewable assets. This will be no mean feat, with the International Energy Agency estimating this year that investment in renewable power would need to double by 2030 to meet the UN’s Sustainable Development Goals and the Paris target. A significant part of this funding will come from institutional investors, who hold the key to unlocking investment desperately needed to tackle the climate crisis.

What is holding investors back?

While the tide is turning, there are still barriers that need to be addressed if institutional investors are to up their allocation to renewables. Energy price uncertainties are seen by investors as the key obstacle, with almost half of those surveyed citing this as a concern.

Another blocker is the lack of renewable energy investment skills within organisations. While liquidity remains an issue for investors, they are considerably less worried about this issue than this time last year, signalling a positive development in the investment climate.

As a significant amount of the world’s energy transition relies on private investment, it is time for the investment community to take its responsibilities seriously. As the market evolves, institutional investors will need guidance in navigating the changing landscape. Institutions must also become more open to different types of investment risks.

While investors have historically been attracted to the fixed, inflation-linked cash flows from renewable energy assets that benefit from government subsidies, there is a limited new supply of these opportunities. Crucially, as subsidies are reduced and removed by governments around the world, investors will need to adapt to a new future of a renewable energy market that reflects the risk profile of traditional energy markets.

The onus is on specialist managers to develop a wider range of products that suit different investors’ needs, and deliver attractive risk-adjusted returns for whatever stage they are at on their renewable investment journey. In terms of liquidity and lack of in-house skills, specialist managers can use their scale to help provide liquidity while leveraging their teams of experts to reduce operational risks and drive improved performance.

Given the scale of the challenge and the limited time we have to make a change, the need for action has never been more urgent. I believe investors have a crucial role to play in averting a climate crisis. They need to truly get behind the energy transition by reallocating capital from fossil fuels, into climate saving assets. If we want to see a wave of new investment into clean energy, it is time to take bold action.