A study from the Climate Policy Initiative, a global policy analysis and advisory organization, finds that government policies and investment practices severely limit how much institutional investors like insurance companies and pension funds can invest in renewable energy projects.
Institutional investors manage a combined $71 trillion in assets and their objectives tend to align with renewable energy returns. That means they could potentially supply one quarter to one half of the investment needed to fund renewable energy projects through 2035.
There is no shortage of potential renewable energy investment opportunities in the developed world. At issue is that fact that they don’t offer an acceptable level of risk for governments and energy consumers.
“Without drastic shifts in government policy, regulation, and investment practices,” to deal with the risks, the investment level won’t grow to those substantial levels, according to David Nelson, Senior Director of CPI.
The study identified three existing potential channels for investment in renewable energy, each of which can come in different forms, such as equity/company shares or loans/bonds. Unfortunately, they all have flaws.
Investment in corporations is relatively easy, but there are too few pure-play renewable companies so investments in them are unlikely to contribute to lower financing costs for renewable energy. Direct investment in renewable energy projects is difficult for institutional investors because the skills and expense required limit these investments to the largest 150 or so institutions. Pooled investment vehicles have similar issues to corporate investment, and so far have had mixed results.
Creating new investment vehicles that are accessible to a winder range of institutions but that would still meet investors’ liquidity and diversification goals would be the most effective way of increasing institutional investment. CPI identified five steps that could help, acknowledging that some may be challenging to execute.
They include fixing policy barriers that discourage institutional investors from contributing to renewable energy projects; building direct investment teams and improving evaluation of investor tolerance for illiquid investments; and modifying regulatory constraints to renewable investment in a way that does not negatively impact the financial security of investors.
Developing better pooled investment vehicles that created liquidity, increased diversification, and reduced transaction costs would reduce risk; and shifting regulatory standards from a project finance model to a corporate model for building renewable energy, would make it possible for institutional investors to increase investment in renewable energy through utility and corporate stocks and bonds.
The study analyzed the investment portfolios of more than 25 pension funds and insurance companies across North America, Europe, and Australia, as well as consultants, bankers, renewable project developers, analysts, and academics.
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