Institutional investors, such as insurance companies and pension funds, manage a combined $71 trillion in assets. As one of the largest pools of private capital in the world, these investors generally have objectives that, on the surface, appear to align with renewable energy returns.
However, in a new study, “The Challenge of Institutional Investment in Renewable Energy,” Climate Policy Initiative (CPI) finds significant limits to a large increase in institutional investment in renewable energy projects. These barriers include government policies and investment practices.
If all policy barriers were removed and investors optimized their renewable energy related investment practices, CPI finds that institutional investors could supply one quarter to one half of the investment needed to fund renewable energy projects through 2035. However, even at these levels of Institutional Investment, it is unclear whether institutional investment would be enough to lower the cost of financing renewable energy materially.
“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,” said David Nelson, Senior Director of CPI. “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.”
Increasing institutional investment beyond these levels will require creating new types of investment vehicles that are accessible to a wider range of institutions while meeting institutional constraints on liquidity and diversification.
“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.
CPI identifies five steps that could help unlock institutional investment capital for renewable energy projects, some of which may be challenging to implement:
- 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.
For more information, and to download the report, visit www.ClimatePolicyInitiative.org
Climate Policy Initiative (CPI) is a global policy effectiveness analysis and advisory organization. Its mission is to assess, diagnose, and support nations’ efforts to achieve low-carbon growth. An independent, not-for-profit organization supported by a grant from the Open Society Foundations, CPI’s headquarters are in San Francisco and regional offices are in Berlin, Beijing, Hyderabad, Rio de Janeiro, and Venice.