Over the last few years, governments worldwide have set out plans to fight climate change. In 2015, several countries signed the Paris Agreement, promising to reduce greenhouse gas emissions and keep global temperatures down. Since then, many countries have put plans into place to make sure they achieve these goals. In the UK, for example, our government has committed to reaching net zero by 2050. This means that by 2050, the UK aims to add no additional carbon to the atmosphere by balancing the amount of emissions we produce and take away.
However, it won’t be possible to achieve these targets and fight global warming without large amounts of investment into renewable energy generation and technologies. At the same time, money will need to be pulled out of fossil fuels. Institutional investors handle trillions of dollars on behalf of their clients (mainly pension funds, insurance firms, large companies and banks) and so are in a great place to make a huge difference on the future of our planet. If these firms choose to invest the money they manage into renewable energy, it could help accelerate our journey to a more sustainable world.
Now more than ever, governments, businesses and investors face an opportunity to concentrate on fighting climate change. Coronavirus has changed our economy, our mindsets and our lives, and it has the potential to drive more investment in a greener future. “Covid-19 can be the catalyst to a greener, more sustainable future,” explains Alex Brierley, co-head of Octopus Renewables. “But it needs to be a collaborative and organised effort from governments, institutional investors, specialist energy fund managers, banks and energy companies.”
Many institutional investors agree. According to the latest Octopus report , almost a third of institutional investors surveyed think the pandemic has made the fight against climate change more urgent. A similar number also believe the coronavirus crisis will speed up the implementation of decarbonisation policies.
Renewables and Covid-19
The coronavirus pandemic has had a surprisingly positive effect on the environment. In early 2020, we saw carbon emissions decreasing as factories shut down, fewer planes took off, and more people worked from home, keeping cars off the road. The demand for energy fell, along with oil prices. And for the first time, Europe generated more electricity from renewable sources than from fossil fuels.
Governments are now being challenged to make the most of these short term environmental gains by putting climate change measures at the centre of their Covid recovery plans. “There is now a huge opportunity for governments everywhere to implement measures that not only help economies recover post the pandemic, but create an environment that encourages further, and greater, investment into renewables at the same time,” Matt Setchell, Co-Head of Octopus Renewables, told us. “It is crucial they do.”
So far, several governments have done just that. The UK’s Build Back Greener plan sets a desire for the country to become a world leader in wind energy. And the EU’s recovery proposal, Next Generation EU, commits to investing 30% of its funds in sustainable, low-carbon technologies.
Encouraged by public demand and government measures, our report shows 80% of institutional investors surveyed [KF6] plan to increase investment in renewable energy over the next few years. This proves investors are still interested in clean energy assets like wind and solar farms, making sure the money they invest has a positive impact.
At the same time, many investors are also planning to move money out of fossil fuels. Last year’s report focused on divestment from oil and gas, highlighting this strategy as investors’ main push towards a cleaner energy future. In the face of Covid-19 uncertainties, the speed of divestment has slowed in comparison to last year’s plans. But institutional investors are still moving money away from fossil fuels, showing momentum has slowed rather than stopped.
Challenges facing investors
While institutional investors are looking to invest more in renewable energy, there are a couple of barriers that could get in the way of these plans. The first of these are concerns about the lack of liquidity involved in renewable energy investments. Once invested in wind or solar farms, money is usually locked up for a set amount of time. Double the amount of investors see this as a big challenge for them, in comparison to last year’s report. This is likely down to doubt caused by coronavirus.
Investors would also like to see more joined-up international policies to fight climate change and are worried that if this doesn’t happen, it will become harder to push for innovation in the renewable space.
The demand for sustainable energy is high, along with appetite to invest among institutions. Our report suggests that we need to address liquidity concerns and encourage countries to work together to remove barriers to investment in clean energy. Government policies aimed at creating more renewable energy generation can go a long way to ease these concerns.
Government support for renewable energy investing, in the form of specific initiatives like the UK and EU’s recovery plans, has already encouraged institutional investors to see opportunities for long term investment in the area. To keep momentum up, our report suggests more governments need to follow suit and set out strategies to build more renewable energy generation assets like wind and solar farms.
While Covid-19 has made institutional investors cautious while moving investment away from fossil fuels, it can also act as a catalyst for more investment in renewable energy. Governments must put lowering carbon emissions at the centre of their Covid recovery plans, creating the opportunity for trillions of dollars of investment from institutional investors. With this injection of funding, renewable energy assets have the potential to help keep global temperatures down, bringing us closer to success in the fight against climate change.