Institutional investors are blowing it on renewable energy

Institutional investors are blowing it on renewable energy

Institutional investors still sitting on the sidelines as the market for renewable energy grows may be missing out on attractive returns in rapidly evolving sectors such as solar and wind energy.

This story originally appeared on BusinessGreen.

Institutional investors are continuing to shift away from carbon-intensive assets but are not moving fast enough to capitalize on the rapid growth of the clean tech sector.

That is the conclusion of new research from indexing firm MSCI, which finds that despite strong predictions for growth in renewable power from organizations such as the International Energy Agency, the investments made by pensions funds and insurance companies are failing to keep pace with the industry's expansion. That means institutional investors are missing out on potentially attractive returns as a result.

According to the IEA, the share of global energy consumption from renewable fuels — including wind, solar and hydro — will increase from 21 percent in 2010 to 25 percent in 2020. Despite growing political uncertainty in the sector, the falling cost of renewable energy technologies has seen wind or solar power reach cost parity with fossil fuels in countries as diverse as Germany, the U.S., India and Brazil — and investors have taken note.

MSCI's research found that nearly 10 percent of power generation companies will increase renewables capacity by at least 10 percent in the next five years. These trends prove highly attractive to investors, whose "concern over mispriced fossil fuel assets or pressure from a persistent call for divestment" has seen many begin to scrutinize the carbon-related risks in their portfolios, MSCI stated.

The firm calculated that if all the additional renewable capacity currently planned by these companies is realized, an investor replicating its broad MSCI All Country World Index would have increased its exposure to renewable generation capacity 22 percent between 2013 and 2018.

This is more than quadruple the rate of growth in coal and gas capacity — but still falls well short of the 39 percent growth projected by IEA for renewable power generation between 2013 and 2018.

Furthermore, despite the expected growth in planned renewables capacity, the share of renewable fuel in the aggregate generation capacity of MSCI ACWI Index companies in 2018 would be 27 percent, the same as coal and slightly ahead of gas at 25 percent. But IEA's projected growth rates put the global installed capacity of hydro and other renewables at a 32 percent share by 2018, overtaking both coal and gas.

"While the publicly listed equities universe will undergo a shift in the underlying energy mix, it may not capture all of the growth in renewables generation capacity that is happening in the real economy," MSCI stated. "In other words, without deliberately tilting more aggressively toward the companies with large and growing renewable capacity, investors potentially risk being under‐exposed to significant growth in future fuel technology."

The report also looked at infrastructure investment, warning years of under-spending have left many countries around the world with critical infrastructure that is incapable of supporting long-term economic growth and likely to be severely affected by climate-related weather impacts.

Worldwide, the upgrade bill could top $50 trillion by 2030, with few governments able to find that level of investment. Specifically, losses associated with climate change-related extreme weather events and projected sea level rise are expected to increase — with the scale of monetary losses far larger in developed nations.

"Of the 20 countries that are projected to have the largest number of people living in areas at risk of flooding, six are developed markets including Germany, Japan and the U.S.; and nine are emerging markets, including some of the largest and fastest growing economies of the past decade such as Brazil, China and South Korea," MSCI stated. "Nine countries, including the U.K., Netherlands and Japan, risk having more than 4 percent of their population face chronic flooding."

However, the firm argued that these various challenges present an opportunity for institutional investors. Still, MSCI stated they increasingly will have to use environmental, social and governance (ESG) factors to help "target growth opportunities in building climate resilience and to minimize governance‐related risks" if they are to adapt to fast-evolving, low-carbon infrastructure trends.

With reports last week showing that clean energy investment grew 16 percent to hit $310 billion in 2014 — reversing two years of decline — and predictions suggesting the green bond market will hit $100 billion this year, 2015 could be the year green investments truly take off. Institutional investors would be advised to find a spot on the runway.