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.
All but two UK regions failing on school energy efficiency
Most schools are still "treading water" on implementing energy efficient technology, according to new analysis of Government data from eLight.
Yorkshire & the Humber and the North East are the only regions where schools have collectively reduced how much they spend on energy per pupil, cutting expenditure by 4.4% and 0.9% respectively. Every other region of England increased its average energy expenditure per pupil, with schools in Inner London doing so by as much as 23.5%.
According to The Carbon Trust, energy bills in UK schools amount to £543 million per year, with 50% of a school’s total electricity cost being lighting. If every school in the UK implemented any type of energy efficient technology, over £100 million could be saved each year.
Harvey Sinclair, CEO of eEnergy, eLight’s parent company, said the figures demonstrate an uncomfortable truth for the education sector – namely that most schools are still treading water on the implementation of energy efficient technology. Energy efficiency could make a huge difference to meeting net zero ambitions, but most schools are still lagging behind.
“The solutions exist, but they are not being deployed fast enough," he said. "For example, we’ve made great progress in upgrading schools to energy-efficient LED lighting, but with 80% of schools yet to make the switch, there’s an enormous opportunity to make a collective reduction in carbon footprint and save a lot of money on energy bills. Our model means the entire project is financed, doesn’t require any upfront expenditure, and repayments are more than covered by the energy savings made."
He said while it has worked with over 300 schools, most are still far too slow to commit. "We are urging them to act with greater urgency because climate change won’t wait, and the need for action gets more pressing every year. The education sector has an important part to play in that and pupils around the country expect their schools to do so – there is still a huge job to be done."
North Yorkshire County Council is benefiting from the Public Sector Decarbonisation Scheme, which has so far awarded nearly £1bn for energy efficiency and heat decarbonisation projects around the country, and Craven schools has reportedly made a successful £2m bid (click here).
The Department for Education has issued 13 tips for reducing energy and water use in schools.