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Investor Interest in Renewables Gathers Steam

by Jared Bochner

  • 26 Jul 2019
  • INF

Firms set to raise record amounts of capital for the sector

Current technologies that generate electricity from renewable resources could supply the US with 80% of its total energy needs by the year 2050, according to a study by the Department of Energy’s National Renewable Energy Laboratory. This would not be without challenges, but the increased investment in renewable energy opportunities proves this is an area of interest, and underlies investors’ belief in the significant financial opportunity in the burgeoning sector.

The Rise of Eco-Investing
In an era of increased environmental consciousness, many institutional investors have committed significant amounts of capital to private funds focused on renewable energy opportunities. Pension funds – whose responsibility as a fiduciary for their pensioners often precludes them from unproven or dubious investments – are particularly active. The five largest US public pension funds alone committed nearly $9bn to renewables funds in 2018.

As climate change drives the planet towards long-term and potentially irreversible damage, the idea of responsible investing among private equity fund managers and investors has gained traction. Organizations promoting impact and ESG investing are attracting increased commitment as a result. Those that exercise caution when entering the sector may be reassured, as metrics that measure an investment vehicle or company’s eco-friendliness have become standardized and more widely available.

Why Renewables?
The motives for employing ESG or impact investing strategies are similar to those that drive investors and managers to invest in renewable energy assets or projects. Companies are insulated from disruptive changes resulting from environmental factors, and a company’s governance and accounting methods can be measured to account for potential risks. Aside from the financial benefits, though, there are a number of external forces that may encourage renewable energy investment. The environmental risk of investing in traditional energy assets is high, as is the social risk – merely associating with companies with high carbon footprints can endanger a firm’s reputation.

Record-Setting Funds in a Growing Market
The market for renewable energy production has grown drastically over the past decade. Spurred by tax incentives and the hundreds of countries, states and cities transitioning to renewable energy, investors and fund managers see more opportunity in the sector than ever before.

Overall growth of infrastructure as an asset class has paved the way for an increase in renewable energy investments. In the past year, marquee managers have raised record-setting infrastructure funds, all of which intend to invest in renewable energy assets: Blackstone Infrastructure I is targeting capital commitments of $40bn, Global Infrastructure Partners IV has raised $13.5bn of $20bn and Brookfield Infrastructure Fund IV has thus far raised $14.5bn –$5.5bn shy of its $20bn target. More than half of the 2,663 infrastructure deals completed in 2018 globally were for renewable energy assets, up eight percentage points compared with 2017 deals.

There are currently 225 renewable energy infrastructure funds seeking commitments, targeting an aggregate $136bn. Renewable energy funds represent 63% of the number of overall infrastructure vehicles in market and 80% of the aggregate targeted capital in the infrastructure industry, illustrating the opportunity in the renewables market.
As more renewable energy projects become available, the demand for financing of solar farms, wind farms and hydropower plants has increased. These assets have benefits similar to traditional infrastructure assets: steady, long-term returns as well as low correlation to other asset classes.

The Challenge Remains
As renewable energy becomes an increasingly lucrative and reliable investment solution, the challenge remains to prove itself a practical alternative for energy production on a widespread scale. Despite the social and governmental incentives, the costs of implementation and adaptation are restrictive, and renewable energy consumption is largely limited to regions that produce it. All things considered, social pressure and growing environmental concern mean that investors and fund managers continue to invest in the renewables sector. Perhaps the influx in incoming capital will help the sector overcome current practical obstacles.

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