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Instos divided over their role in net zero transition

By Rhea Nath
4 minute read

While institutional investors unanimously acknowledge the energy transition as a significant challenge, their perspectives on the extent of their involvement in addressing the substantial capital requirements vary widely.

According to the World Energy Transitions Outlook 2023 by the International Renewable Energy Agency, there exists an “enduring investment gap” on the journey to net zero, with the global energy transition necessitating approximately US$5 trillion in annual investments until 2030.

In 2022, global investment across all energy transition technologies reached a record high US$1.3 trillion, but fell below the necessary amount required to stay on track.

To address these shortfalls, UN Secretary-General António Guterres previously urged major investors with significant global capital to contribute to achieving net-zero carbon emissions.

“The private sector has a crucial role to play in building a more equitable and sustainable world,” Guterres said in 2021 at a meeting of the Net-Zero Asset Owners Alliance, which now includes almost 90 asset owners representing US$9.5 trillion in assets under management.

Speaking at a conference in Melbourne this week, Blackstone chief executive and co-founder Steve Schwarzman underscored the pivotal role institutional investors play in addressing societal challenges.

Talking to inequality and climate change, among others that require attention, he highlighted that addressing climate is comparatively “easier” given its tangible and measurable outcomes.

“Climate change is easier […] because you can measure what you’re doing, and it’s reasonably straightforward for financial investors to emphasise certain types of outcomes that they’d like to see,” Schwartzman said.

He pointed to Blackstone‘s significant involvement in this sector, citing their investment of over $3 billion since 2022 in the US firm Invenergy, which is known as the largest private renewable energy company in North America.

Invenergy’s activities – which include developing, owning, and operating large-scale renewable and other clean energy generation, transmission and storage facilities in the Americas, Europe and Asia – require “enormous amounts of capital”, Schwartzman observed.

“These are huge numbers – and there’s a need for institutional investors to actually put money up in these types of areas, where the returns frankly can be very good,” he said.

A unique set of challenges

However, while conceding that the energy transition remains a crucial issue, UniSuper’s chief investment officer, John Pearce, stressed the additional considerations superannuation funds have when investing members‘ retirement savings towards the transition.

“We’ve got to come back to our primary fiduciary responsibility and that’s not just members’ best interest, it’s members’ best financial interest. It’s very, very explicit, so that’s the first box you have to tick,” he told audience members at the conference.

UniSuper prioritises this fiduciary duty in its investment decisions, Pearce said. He cited UniSuper’s co-investment alongside ISPT and HESTA in 2022 to create a circa $600 million Health Translation Hub (HTH) project in the heart of the Randwick Health & Innovation Precinct as an example of where this duty aligned with a social benefit.

“It ticked all the financial boxes and we’re also able to do good for society,” he said.

While highlighting the energy transition as a major concern for investors, with governmental encouragement for institutional participation, Pearce noted that ultimately, UniSuper needs to see the metrics and “they’ve got to work for us”.

Earlier this month, incoming Future Fund chair, Greg Combet, also elaborated on the “significant investment task” ahead regarding the journey to net zero.

“Ideally, institutional investors, private capital would see the opportunities in it and make commercial judgements and invest – and they are, where they can see that making sense,” Combet said in an address to the National Press Club in Canberra in his capacity as outgoing chair of the Net Zero Economy Agency.

“But I can see occasions and projects in this particular transformation where government is going to need to play a role. That’s not novel – electricity infrastructure in the past has been virtually all public infrastructure, it’s only been privatised in recent decades.”

Admitting this would be a “tough challenge” for private investors, given the legal requirements and permissions required, Combet said the Net Zero Economy Authority would have to work through these considerations in coming years.

“Where it’s proving difficult for something that’s clearly in the public interest, a particular project to take place and government’s having a good look at it and considering whether or not there’s a role for government to provide concessional debt or equity investment to help de-risk a project – that’ll have to be done in a disciplined and rigorous way because no one wants to deploy taxpayer money unnecessarily,” he explained.

“But you can see that a partnership in some particularly significant transformative projects is likely going to be necessary.”