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 launched by Octopus today, 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% to 7.1% over the next five years. Of those institutions currently invested in renewables, more than two-fifths (42%) expect to increase allocations by as much as 10%.
What is driving investment?
Current market volatility and the perceived end of the market bull run is driving increased allocations to renewable infrastructure. Two-thirds (66%) 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%) of institutions invested in the sector choosing renewables primarily to fulfill ESG criteria. Almost half (48%) 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%) identify energy price uncertainty as a challenge for them when pursuing investment in renewables.
• Liquidity issues: two fifths (41%) cite liquidity issues as a challenge.
• Operating, implementation and execution costs: more than a third (34%) find costs to be a challenge.
• Lack of scale: a third (34%) find they do not have the size and scale to pursue renewables.
• Government and regulatory barriers: a third (33%) 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%).
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.”
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.
— Solar Builder magazine
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