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 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%.
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 fulfil 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.”
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:
Educate investors on underlying risks, particularly energy price uncertainty so that they understand how market fluctuations may impact their returns.
Mitigate risk through a team of specialists that reduce both operational and commercial (energy price) risks alongside using existing scale to benefit investors.
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%) 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%) of institutions invested in the sector from the survey choose renewables primarily to fulfil ESG criteria.
Almost half (47%) of institutions overall from the survey adopt ESG within portfolios as a result of end investor demand. Further, over half (57%) 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% and 8.4% respectively.
Asia falls behind with 3.3% and 6.1% respectively according to the survey.
UK is the preferred location for investment into renewables among survey respondents
More than half (55%) of those respondents invested in the sector prioritise investment into renewables in the UK.
Grid-scale solar panel plants are the most popular way to access renewables
Half of respondents (43%) currently invest in solar, compared with a third (28%) invested in on-shore wind power plants and off-shore wind power plants respectively.
UK must stop blundering into high carbon choices warns CCC
The UK Government must end a year of climate contradictions and stop blundering on high carbon choices, according to the Climate Change Committee as it released 200 policy recommendations in a progress to Parliament update.
While the rigour of the Climate Change Act helped bring COP26 to the UK, it is not enough for Ministers to point to the Glasgow summit and hope that this will carry the day with the public, the Committee warns. Leadership is required, detail on the steps the UK will take in the coming years, clarity on tax changes and public spending commitments, as well as active engagement with people and businesses across the country.
"It it is hard to discern any comprehensive strategy in the climate plans we have seen in the last 12 months. There are gaps and ambiguities. Climate resilience remains a second-order issue, if it is considered at all. We continue to blunder into high-carbon choices. Our Planning system and other fundamental structures have not been recast to meet our legal and international climate commitments," the update states. "Our message to Government is simple: act quickly – be bold and decisive."
The UK’s record to date is strong in parts, but it has fallen behind on adapting to the changing climate and not yet provided a coherent plan to reduce emissions in the critical decade ahead, according to the Committee.
- Statutory framework for climate The UK has a strong climate framework under the Climate Change Act (2008), with legally-binding emissions targets, a process to integrate climate risks into policy, and a central role for independent evidence-based advice and monitoring. This model has inspired similarclimate legislation across the world.
- Emissions targets The UK has adopted ambitious territorial emissions targets aligned to the Paris Agreement: the Sixth Carbon Budget requires an emissions reduction of 63% from 2019 to 2035, on the way to Net Zero by 2050. These are comprehensive targets covering all greenhouse gases and all sectors, including international aviation and shipping.
- Emissions reduction The UK has a leading record in reducing its own emissions: down by 40% from 1990 to 2019, the largest reduction in the G20, while growing the economy (GDP increased by 78% from 1990 to 2019). The rate of reductions since 2012 (of around 20 MtCO2e annually) is comparable to that needed in the future.
- Climate Risk and Adaptation The UK has undertaken three comprehensive assessments of the climate risks it faces, and the Government has published plans for adapting to those risks. There have been some actions in response, notably in tackling flooding and water scarcity, but overall progress in planning and delivering adaptation is not keeping up with increasing risk. The UK is less prepared for the changing climate now than it was when the previous risk assessment was published five years ago.
- Climate finance The UK has been a strong contributor to international climate finance, having recently doubled its commitment to £11.6 billion in aggregate over 2021/22 to 2025/26. This spend is split between support for cutting emissions and support for adaptation, which is important given significant underfunding of adaptation globally. However, recent cuts to the UK’s overseas aid are undermining these commitments.
In a separate comment, it said the Prime Minister’s Ten-Point Plan was an important statement of ambition, but it has yet to be backed with firm policies.
Baroness Brown, Chair of the Adaptation Committee said: “The UK is leading in diagnosis but lagging in policy and action. This cannot be put off further. We cannot deliver Net Zero without serious action on adaptation. We need action now, followed by a National Adaptation Programme that must be more ambitious; more comprehensive; and better focussed on implementation than its predecessors, to improve national resilience to climate change.”
Priority recommendations for 2021 include setting out capacity and usage requirements for Energy from Waste consistent with plans to improve recycling and waste prevention, and issue guidance to align local authority waste contracts and planning policy to these targets; develop (with DIT) the option of applying either border carbon tariffs or minimum standards to imports of selected embedded-emission-intense industrial and agricultural products and fuels; and implement a public engagement programme about national adaptation objectives, acceptable levels of risk, desired resilience standards, how to address inequalities, and responsibilities across society.
Drax Group CEO Will Gardiner said the report is another reminder that if the UK is to meet its ambitious climate targets there is an urgent need to scale up bioenergy with carbon capture and storage (BECCS).
"As the world’s leading generator and supplier of sustainable bioenergy there is no better place to deliver BECCS at scale than at Drax in the UK. We are ready to invest in and deliver this world-leading green technology, which would support clean growth in the north of England, create tens of thousands of jobs and put the UK at the forefront of combatting climate change."
Drax Group is kickstarting the planning process to build a new underground pumped hydro storage power station – more than doubling the electricity generating capacity at its iconic Cruachan facility in Scotland. The 600MW power station will be located inside Ben Cruachan – Argyll’s highest mountain – and increase the site’s total capacity to 1.04GW (click here).
Lockdown measures led to a record decrease in UK emissions in 2020 of 13% from the previous year. The largest falls were in aviation (-60%), shipping (-24%) and surface transport (-18%). While some of this change could persist (e.g. business travellers accounted for 15-25% of UK air passengers before the pandemic), much is already rebounding with HGV and van travel back to pre-pandemic levels, while car use, which at one point was down by two-thirds, only 20% below pre-pandemic levels.