The first renewable energy investment report published by Octopus reveals the size of the opportunity for institutional investors. We asked Matt Setchell and Alex Brierley of Octopus Renewables to state the investment case.
There has never been a more pressing time to think about renewable energy investment. At the end of 2018, the Intergovernmental Panel on Climate Change (IPCC) issued the starkest warning yet on the risks of rising global temperatures. Despite all the efforts to date, global emissions are still rising, and the impact of a two-degree increase on our planet is catastrophic.
Rising global temperatures will be disastrous
A two-degree increase means devastated ecosystems, ice-free summers in the Arctic, widespread coral die-offs, decreasing crop yields, and consequential mass relocations, and water will, perversely, become an increasingly scarce resource, according to IPCC research.
Avoiding these unimaginable changes requires trillions in investment, strong global leadership and long-term thinking. The combination of these three vital elements is found in institutional investors. This is the group whose influence can catalyse the transformation required to reduce global warming.
About the report
The first Renewable Energy Investment Report from Octopus is titled: The green investor: why institutional investing holds the key to a renewable energy future. We created this report because we wanted to identify what drives institutional investors towards the asset class, and to find out what is holding them back. We believe these roadblocks can be overcome and, at the end of the report, we suggest how.
Some key findings
The good news is that our research suggests that institutional investors are increasing their investment allocations in renewable energy markets. Almost half of those already invested in the renewables sector, as surveyed within the report, are set to increase their allocations to renewables by up to 10% over the next five years.
Among both global respondents already invested and those yet to invest in the sector, allocations to renewable energy are expected to almost double from 4.4% to 7.1% over the next five years. This amounts to an additional $210 billion commitment to renewable energy from those surveyed.
Where are institutions looking to invest?
Bloomberg New Energy Finance estimated that $10 trillion will be invested in zero carbon generation capacity between 2018 and 2050, with $8.4 trillion of that going into wind and solar. To put this into perspective, the total investment into wind and solar equates to roughly twice the global market capitalisation of the oil and gas sector.
Therefore, while the increasing focus on renewable energy by institutional investors is welcome, given the scale of investment required, we believe far more needs to be done to help institutional investors allocate even more funds into renewable energy assets.
Sentiment is shifting in the right direction
Fortunately, the step change needed will be bolstered by increasing enthusiasm not just from institutional investors per se, but also their underlying investors. According to a recent survey by Morgan Stanley, 84% of ‘Millennials’ cite investing with a focus on Environmental, Social & Governance (ESG) impact as a central goal. In addition, by 2020, the spending power of these green investors will have overtaken that of ‘Generation X’, and will continue to grow. But renewable energy investment is not just about ESG. While having a fundamentally positive impact on the planet, the asset class is unique in delivering an attractive risk-adjusted return that diversifies away from equities and bonds into predictable cash flows.
Identifying some of the headwinds for investors
However, we created this report because alongside identifying the key drivers for institutions investing into renewable energy, we also wanted to understand the reasons why some investors might be holding back from investing. Crucially, the roadblocks identified – concerns around energy price uncertainty, liquidity issues and lack of in-house renewable asset management skills and resources – are surmountable.
How can Octopus unlock investment into renewables?
As a specialist renewable energy investor, it’s our mission to accelerate the transition to a future powered by renewable energy. We want to accelerate the transition to a low-carbon future by helping investors to invest into renewable energy, while also delivering an attractive risk-adjusted return that meets their investment objectives.
We believe that there are three key ways to help unblock investment into this asset class: educating investors on underlying risks, mitigating those risks, and tailoring investments specifically to meet investor requirements.
An unrivalled track record in renewable energy infrastructure
Since 2011, the team has built market-leading positions as an investor and manager of solar, wind, biogas, biomass, landfill gas, and reserve power assets. Octopus is the largest non-utility investor in onshore renewables in the UK, and also the largest commercial solar player in Europe.
As a specialist, innovative renewables investor, we believe there is a huge opportunity to unblock investment by building bespoke portfolios of renewables assets, at scale, and across technologies and countries, to create better outcomes for our investors. The lessons delivered by the IPCC are very clear.
Acting now is not an option. It is a necessity.