Report: Renewables missing out on $71trn investment pot

By John Parnell

Renewable energy will miss out on increased funding from big investors if existing barriers are not removed, a new report has warned.

Institutional investors such as pension funds and insurance firms hold $71 trillion in assets but are holding back from clean energy investments by a number of policy and regulatory hurdles.

The report by the Climate Policy Initiative (CPI) found that if all these were removed, institutional investors could provide 25-50% of all the necessary investment for renewable energy up till 2035.

“Policymakers and renewable energy project developers often look to institutional investment as a potential source of capital that can help reduce the cost of wind and solar projects,” said David Nelson, senior director, CPI.

Unlocking big institutional investment could provide one quarter to one half of the necessary funding for clean energy till 2035 (Credit: Vestas)

“Our findings suggest that in the near future, this is unlikely to be the case without drastic shifts in government policy, regulation, and investment practices,” added Nelson.

Many of these investment pots have a “fiduciary duty” to those whose money they manage, to invest wisely and do their best to get returns.

One fund investing in an entire renewables project could be seen as taking on too much risk with other people’s money.

The report suggests that by investing in the companies working on the projects instead or enabling different funds to pool their resources and so share the risk, more money could be channelled into the sector.

The Institutional Investors Group on Climate Change, the Investor Group on Climate Change, the Investor Network on Climate Risk, and the United Nations Environment Programme Finance Initiative contributed a foreword to the report.

“While institutional investors may not be the panacea for renewable energy investment, there may be opportunities for institutional investors to make renewable energy a part of their portfolios while going partway towards meeting policymaker goals,” they wrote.

Many renewable energy technologies are propped up by government subsidies to help meet renewable energy targets. The threat of changes in this support can deter some investors.

The EU has a target to generate 20% of its electricity from renewable sources by 2020 while China has a 15% target for the same year.

CPI’s five fixes to attract renewable energy investment

-Fix policy barriers that discourage institutional investors from contributing to renewable energy projects.

-Improve investment practices, including the building of direct investment teams and improving evaluation of investor tolerance for illiquid investments. However, such changes can run counter to the culture of the organization and require careful consideration.

-Identify and improve any regulatory constraints to renewable investment that can be modified without negatively impacting the financial security, solvency or operating costs of the pension funds or insurance companies.

-Develop better pooled investment vehicles that create liquidity, increase diversification, and reduce transaction costs while maintaining the link to underlying cash flows from renewable energy projects.

-If the concern is raising enough finance rather than its cost, regulators and policymakers could shift from a project finance model to a corporate model for building renewable energy. Institutional investors could then increase investment in renewable energy through investment in utility and corporate stocks and bonds.

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