Research - FEBRUARY 11, 2019

Institutional investors to allocate $210b to renewable energy assets over the next 5 years

by Jody Barhanovich

A new survey report from Octopus reveals the biggest challenges causing institutions to hold back investment in renewables. Institutional investors plan to almost double portfolio allocations to renewable energy over the next five years. An estimated $210 billion from investors surveyed for a new report is expected to flow into the asset class over the period.

The report, The green investor: why institutional investing holds the key to a renewable energy future, is based on a survey of global institutional investors with a collective $6.8 trillion of assets under management. It reveals that allocations to renewables will increase from 4.4 percent to 7.1 percent over the next five years. Of those institutions currently invested in renewables, more than two-fifths (42 percent) expect to increase allocations by as much as 10 percent.

Current market volatility and the perceived end of the market bull run is driving increased allocations to renewable infrastructure. Two-thirds (66 percent) of renewable energy investors surveyed cite diversification as the main driver prompting them to invest in the sector. This is closely followed by the pursuit of environmental, social and governance (ESG) credentials, with more than half (58 percent) of institutions invested in the sector choosing renewables primarily to fulfil ESG criteria. Almost half (48 percent) cite predictable cash flows as a primary driver into renewable infrastructure.

Yet despite increasing investor appetite for renewables, the report reveals a number of challenges to overcome, to open up additional investment in the sector:

  • Energy price uncertainty: over half of respondents (56 percent) identify energy price uncertainty as a challenge for them when pursuing investment in renewables.
  • Liquidity issues: two-fifths (41 percent) cite liquidity issues as a challenge.
  • Operating, implementation and execution costs: more than a third (34 percent) find costs to be a challenge.
  • Lack of scale: a third (34 percent) find they do not have the size and scale to pursue renewables.
  • Government and regulatory barriers: a third (33 percent) cite government and regulatory barriers as a challenge to investing. Of those surveyed, the biggest factor that would cause them to increase investment in renewables would be better support and policies from government (52 percent).

The International Renewable Energy Agency estimates $1.7 trillion of investment is needed between 2015 and 2030 to meet global renewable energy targets to combat climate change. According to Octopus, investment from institutions in renewables will need to increase to deliver this required investment. To drive additional investment, these challenges must be addressed.

Commenting on the report’s findings, Matt Setchell, co-head of energy investments at Octopus, said, “Institutional investors are waking up to the investment opportunity that comes with securing a renewable future. There is much to celebrate in the report. However, while institutional investors’ contributions are on the increase there remains a long way to go to plug the funding gap. We cannot afford to view increased allocations as ‘job done’. More needs to be done to unblock investment to help tackle climate change. Acting now is not an option; it is a necessity.

“Our report identifies the key barriers that need to be overcome to enable institutional capital to support a renewables future. Clarity on policy from government; flexible investment opportunities to suit investor needs and skilled managers who are able to identify and offset risks will be crucial to unlocking further institutional investment into the sector.”

Hiti Singh, head of institutional funds at Octopus Group, said, “Investors are becoming increasingly aware that renewable energy infrastructure combines the opportunity to diversify with the opportunity to fulfil ESG credentials over the long-term. Institutions seeking to invest in longer-term structural trends amid current market uncertainty can find plenty of opportunity in renewables. Renewable infrastructure also supports ESG priorities without compromising returns.

“The biggest driver among those surveyed for pursuing renewables was the opportunity to diversify. We have seen first-hand how the perceived end of the market bull-run and geopolitical risks drive institutions to seek real assets, like renewables.”

To address the funding gap, Octopus has set out a three-point plan for unblocking the institutional investment needed to deliver a renewable future:

  1. Educate investors on underlying risks, particularly energy price uncertainty so that they understand how market fluctuations may impact their returns.
  2. Mitigate risk through a team of specialists that reduce both operational and commercial (energy price) risks alongside using existing scale to benefit investors.
  3. Create more choice by tailoring investments into renewable energy assets to combine assets across technologies, jurisdictions and energy price exposure to fit different risk-return appetite from investors.

Key report findings include:

Diversification and ESG drive investors to renewables

  • Two-thirds (66 percent) of respondents say diversification and the opportunity to invest in an asset class that has a low correlation to financial markets are the main drivers to renewables.
  • ESG is the second-biggest driver into renewables. Half (58 percent) of institutions invested in the sector from the survey choose renewables primarily to fulfil ESG criteria.
  • Almost half (47 percent) of institutions overall from the survey adopt ESG within portfolios as a result of end investor demand. Further, over half (57 percent) of institutions cite protecting their profile and image as the main rationale for taking ESG into account.

EMEA is leading the charge with its allocations to renewables

  • Respondents from EMEA have the highest level of current and future allocations to renewable energy assets at 5.8 percent and 8.4 percent, respectively.

Asia falls behind with 3.3 percent and 6.1 percent, respectively, according to the survey.U.K. is the preferred location for investment into renewables among survey respondents

  • More than half (55 percent) of those respondents invested in the sector priorities investment into renewables in the United Kingdom.

Grid-scale solar panel plants are the most popular way to access renewables

  • Half of respondents (43 percent) currently invest in solar, compared with a third (28 percent) invested in on-shore wind power plants and off-shore wind power plants respectively.

Octopus specializes in smaller companies, renewable energy and healthcare infrastructure.



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