Institutional investors could supply more than a quarter of the capital needs of renewable energy up to 2035 but are being held back by policy and regulatory barriers, a study claims.
According to research from the US-based Climate Policy Initiative think-tank, institutions such as pension funds and insurance firms worldwide manage around US$71 trillion of investors’ money, capital that could be used to meet a quarter to a half of the investment needs of renewable energy through to 2035.
But the report said investment of this scale is unlikely to happen without policy and regulatory reforms and the creation of new investment vehicles to channel institutional money into renewable energy.
David Nelson, Senior Director of CPI, said: “Policymakers and renewable energy project developers often look to institutional investment as a potential source of capital that can help reduce the cost of wind and solar projects. Our findings suggest that in the near future, this is unlikely to be the case without drastic shifts in government policy, regulation, and investment practices.”
The report highlights numerous policies that are standing in the way of greater institutional investment in renewable energy.
Among these it cites the use of tax credits in the US as a potential discouragement to investors such as pension funds that are tax exempt and for which tax credits therefore have less value.
And it says “lukewarm or inconsistent” energy policies can create perceived risks for institutional investors, for example the retroactive feed-in tariff cuts being imposed in Spain.
To overcome these hurdles, the report recommends five actions:
Fix policy barriers that discourage institutional investors from contributing to renewable energy projects.
Improve investment practices, including the building of direct investment teams and improving evaluation of investor tolerance for illiquid investments. However, such changes can run counter to the culture of the organization and require careful consideration.
Identify and improve any regulatory constraints to renewable investment that can be modified without negatively impacting the financial security, solvency or operating costs of the pension funds or insurance companies.
Develop better pooled investment vehicles that create liquidity, increase diversification, and reduce transaction costs while maintaining the link to underlying cash flows from renewable energy projects.
- If the concern is raising enough finance rather than its cost, regulators and policymakers could shift from a project finance model to a corporate model for building renewable energy. Institutional investors could then increase investment in renewable energy through investment in utility and corporate stocks and bonds.
“While institutional investors may not be the panacea for renewable energy investment, there may be opportunities for institutional investors to make renewable energy a part of their portfolios while going partway towards meeting policymaker goals,” said the Institutional Investors Group on Climate Change, the Investor Group on Climate Change, the Investor Network on Climate Risk, and the United Nations Environment Programme Finance Initiative in a foreword to the report.