- New report from Octopus reveals strong demand for renewables in the face of volatility
- But Covid-19 uncertainty significantly slows pace of divestment from fossil fuels
Global institutional investors plan to almost double their allocations to renewable energy infrastructure in the near-term, upping their current allocation of 4.2% of their overall portfolio, to 8.3% in the next five years. This is expected to increase to 10.8% over ten years as the global response to climate change gains momentum. This is among the key findings of the latest annual report from Octopus, based on a survey of institutional investors representing $6.9 trillion under management.* Among this sample alone, planned investment in renewables will see $742.5 billion move into the sector over the next decade.
Global institutional investors plan to almost double their allocations to renewable energy infrastructure in the near-term, upping their current allocation of 4.2% of their overall portfolio, to 8.3% in the next five years. This is expected to increase to 10.8% over ten years as the global response to climate change gains momentum. This is among the key findings of the latest annual report from Octopus, based on a survey of institutional investors representing $6.9 trillion under management.* Among this sample alone, planned investment in renewables will see $742.5 billion move into the sector over the next decade.
80% of institutions plan to increase their allocations to renewable energy infrastructure over the next three to five years. However, the uncertainty and challenges caused by Covid-19 and the associated downturn have slowed the pace of divestment from fossil fuels, with investors on average divesting 4.5% of their overall portfolio in 2020, compared with 5.7% (forecast for 2020) in Octopus’ 2019 survey. Looking ahead, investors have significantly cut their planned rate of divestment, expecting to divest 5.2% over the next five years and 8.6% over ten years, down from the 14.4% and 15.6% forecasts provided by investors for the same time periods in the 2019 survey.
The report, Renewables and the recovery: accelerating investment in a post-pandemic world, reveals that renewable energy assets have remained resilient during the pandemic, with 50% of investors saying renewables have become more attractive investments during the crisis and associated downturn for several reasons. Some 86% of institutional investors globally say the prevailing low interest rate environment and volatility in equity markets is pushing them to seek uncorrelated sources of higher yield. More than half (53%) of investors point to stable and predictable cash flow as a reason to invest in renewables, and 48% cite the sector’s long-term yield outlook. In terms of drivers for investment, 78% of investors see pressure from millennials as boosting demand for renewables.
Despite continuing strong demand for renewables, the report identified several barriers to unlocking further investment in the sector as institutional investors navigate the impact of the Covid crisis and the increased volatility in global financial markets. Liquidity concerns have risen up investors’ agenda and were seen as the biggest challenge for global investors (43%) compared to only 19% of investors citing this as an issue in 2019. This is followed by energy price uncertainty (38%) and a lack of renewables skills and resources (28%). Over half (52%) call for greater access to specialist renewable managers to invest or manage assets on their behalf, signalling the need for managers to create a broader range of renewable investment products to encourage further sector investment.
Alex Brierley, Co-head of Octopus Renewables, said:
“Renewable energy has proved an incredibly attractive asset class in the face of this year’s volatility, buoyed both by growing external pressures to invest responsibly, and by investors looking for long-term sources of yield. There is further progress to be made however, and alongside renewables investment, divestment from fossil fuels also remains key. As gatekeepers to trillions of dollars, institutional investors have a critical role in fighting climate change. But to move the dial, investors have been clear that issues such as lack of government coordination, liquidity issues, and energy price uncertainty are standing in their way.
“Alongside governments, specialist energy fund managers, like ourselves, need to ensure we make investments more accessible and encourage greater investment in renewables and divestment of fossil fuels. We also recognise that there will be multiple routes to market and that investors will be at different stages of the journey. But understanding of the asset class’ ability to provide stable, long-term returns, while helping save the planet is growing. It is critical we use this momentum to drive further positive change.”
On a regional level, expected demand for renewable assets is strongest from investors in Europe, the Middle East and Africa (EMEA), who expect to increase allocations from 4.6% of total portfolios today to 10.1% in five years. EMEA is closely followed by UK investors, who anticipate increases from 4.6% to 9.3% over the same period, while the US significantly lags other regions, with expected moves from 3.5% today to 6.1% in five years.
Investors also gave their views on moves by governments to support renewables. While more than 40% of investors believe initiatives including the UK’s net zero pledge and Next Generation EU will successfully drive greater investment in renewable energy, most institutions believe it is governments working together that can deliver the step-change that’s needed. More than two-thirds of global investors (68%) say a lack of international cooperation is the number one factor negatively impacting energy transition.
Matt Setchell, Co-head of Octopus Renewables, said:
“We are facing two crises of unprecedented scale: the global pandemic and climate change. Covid has radically impacted how we live, how businesses function and has forced governments across the world to act with urgency. Alongside these efforts, it is also critical that the longer-term threat of climate change remains a focus. Covid-19 can be the catalyst to a greener, more sustainable future, if governments, investors, specialist managers and energy companies are willing to work together.
“We are now at a crossroads and must seize this opportunity to build a global post-pandemic economic recovery that also opens up the renewable energy sector to attract the capital needed to tackle climate change. If we don’t act together, and if we don’t act now, it will be too late.”
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For journalists in their professional capacity only. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: November 2020.