Appetite for renewable energy infrastructure already driven by ESG priorities and the impending power transition is forecast to keep rising, as more investors pivot towards net-zero emissions targets.
A new report from specialist consultant bfinance has found demand for renewables is on the rise, with a growing number of institutional asset owners seeking ESG-related thematic investments and impact investments that aim to deliver non-financial outcomes.
Around a third (34 per cent) of investors in real assets (infrastructure and real estate) are involved in thematic investing, with a further 20 per cent signalling they are considering doing so.
As of late, there has been a trend among asset owners of assessing portfolio carbon emissions and creating targets around emission reduction.
Recent data from bfinance showed that 46 per cent of asset owners globally are assessing portfolio carbon emissions, a jump from 13 per cent three years ago and a further third that are actively considering doing so.
“As more and more investors in Australia commit to net zero carbon emissions by 2050, we expect the interest in renewables will only accelerate in order to meet stated carbon reduction targets,” Frithjof van Zyp, senior director of bfinance’s Australian office commented.
“This is very much in line with the interest we are seeing in renewables from institutional asset owners globally.”
Renewable infrastructure tipped to give higher returns
Ganesh Suntharam, chief investment officer at Redpoint Investment Management believes the energy transition, bolstered by China’s commitment to carbon emission targets and the return of the US to the Paris Climate Agreement, will present significant potential for above-average risk-adjusted investment returns.
He has forecast new opportunities to unfold within global listed infrastructure assets, with an increasing number of established, renewable energy infrastructure companies listed on international exchanges.
“These renewable infrastructure assets have a diversified mix of revenue streams from multiple renewable sources and geographies, and are well ahead of many traditional utility companies in terms of the transition to clean energy,” Mr Suntharam said.
“Many of these renewable energy companies have also established a first-move advantage and in doing so, have built up significant technical expertise and experience in owning and operating renewable energy generation assets.”
But investors looking to obtain increased exposure to listed renewable infrastructure companies may not find their needs are met by typical benchmarks.
“Most infrastructure benchmarks typically contain little exposure to renewable energy companies outside of the traditional utility companies, which themselves are still dominated by fossil fuels,” Mr Suntharam said.
“US-headquartered NextEra Energy is the only company with a majority of its business exposure from clean energy that features in the FTSE Core Developed infrastructure index flagged in the Your Future Your Super legislation.”
Asset managers shifting to meet demand
The market is already adapting to demand: the bfinance report noted there are more than 65 strategies fundraising for renewable energy infrastructure as of early 2021 – compared to around 50 in 2019.
Due to a general reduction in expected returns, particularly for conventional technology, managers have been evolving their strategies. bfinance noted an increasing wave of managers entering projects during the development phase.
Some managers have expanded their geographical remit, adding areas such as central and eastern Europe or developed Asia, while others are incorporating newer technologies, such as offshore wind, rather than focusing purely on the conventional sectors of onshore wind, solar and hydro.
A growing number of strategies are also targeting less established themes associated with the energy transition, such as smart meters, electric vehicle charging or grid stability projects. According to bfinance, a common emerging theme is the use of batteries paired with renewable energy generation projects.
Anish Butani, senior director of private markets at bfinance said the economics of renewable energy infrastructure are “fundamentally changing with the overall withdrawal of subsidies and the development of the technologies”.
“With more competition than ever, both from a fundraising perspective and an investment perspective, managers are having to be creative and adapt to the new climate,” Mr Butani said.
“From a portfolio perspective, we know renewable energy companies bring diversification benefits and potential for cashflow and dividend growth as they become more mature, so the ability to find these investments using a systematic, research-driven approach is more important than ever,” Mr Suntharam added.
“The sector now presents investors with an opportunity to invest in more mature assets with stable yield and growth characteristics similar to those of other infrastructure sectors.
“Expectations for escalating multi-decade growth and development in the sector is expected to underpin the investment case for renewables as a valuable, long-term investment.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
For the US-based chiefs of Citigroup, shuttering the underachieving Australian consumer business could not have come soon enough. ...