Investments in clean energy across unlisted asset classes (such as property, private equity, infrastructure, agriculture and timberland) and projects (such as renewable energy and energy efficiency projects) is clearly growing (see below).
As with any unlisted opportunity, when allocating capital to unlisted low-carbon opportunities, investors need to evaluate considerations such as the fit with their: investment policies (including climate change policies), investment beliefs, risk/return profile and investment constraints (size, liquidity, internal capacity, regulatory requirements in local jurisdictions).
Investors in unlisted markets need to consider their appetite for opportunities that:
- have an explicit investment focus and label on one or all of the low-carbon, energy efficiency or climate resilient themes;
- seek to integrate considerations related to the lowcarbon transition, although not explicitly labelled as such (including managing, upgrading and adapting existing holdings);
- seek a combination of both explicit low-carbon focused mandates, as well as integration into core mandates.
Institutional investors can access opportunities in unlisted low-carbon assets through the usual avenues for unlisted funds or assets.
- Fund of funds: Investing in funds of funds (FoF) that have an explicit or integrated approach to (one or all of) low-carbon, energy efficiency and climate adaptation as part of the criteria to invest in the underlying funds. Such labelled FoF offerings are most prevalent in private equity and infrastructure, although agriculture and timberland funds with such a focus are also available.
This might appeal to investors that have an existing preference and policy to invest through fund of fund structures and are seeking to build a broadly diversified exposure to low-carbon investment opportunities.
- Funds: Funds that have an explicit or integrated approach to (one or all of) low-carbon, energy efficiency and climate adaptation as part of the criteria to invest in the underlying (private market) companies. Such labelled funds are most prevalent in private equity and infrastructure assets, with a particular focus on renewable energy, energy efficiency and the built environment (although timberland/land use and agriculture/resource funds are also available).
This might appeal to investors that have an existing preference and policy to invest in private markets through funds and are seeking to build a more focused, thematic exposure to better position for the low-carbon transition process.
- Direct investments: Direct investments into projects and assets that have an explicit or integrated approach to (one or all of) low-carbon, energy efficiency and climate adaptation. Such opportunities are most prevalent in projects related to renewable energy and energy efficiency.
This might appeal to investors that have an existing preference to invest in private markets through direct investment opportunities and are seeking to build exposure to better position for the low-carbon transition process.
- Partnerships: Investing in partnership with governments, development banks, international financial institutions and/or companies to position for the low-carbon transition process. Such opportunities are most prevalent in projects related to renewable energy and energy efficiency in both developed and (increasingly) developing markets.
This might appeal to investors that have an existing preference to invest in private markets in partnership with other entities, and/or those investors that are considering options to expand their investments into new regions, markets and industries, while also seeking to better position for the low-carbon transition process.
The broad array of funds and direct investment opportunities makes it difficult to aggregate the investment characteristics for this universe precisely, but Figure 9 sets out some of the high-level investment characteristics that are typical of low-carbon unlisted funds and assets.
Investment characteristics of low-carbon unlisted funds and assets
|Investment objectives||“Deliver strong investment returns while providing access to renewable energy…increasing energy efficiency…combating climate change…positioning for the low-carbon transition.”|
|Investment horizon||10+ years|
|Benchmarks||Examples include absolute return and CPI+|
|Fees||Typical of other unlisted funds and assets (can be lower for first time funds to attract capital and investments in partnership with other entities)|
|Number of holdings||FoF the most diversified with direct investments the most concentrated|
|Sectors||Varies depending on type of mandate and degree of focus on low-carbon thematic|
|Risk indicators||Most funds assess the risks at 6 on a scale of from 1 (low) to 7 (high)|
|Link to mitigation of climate-related risks and capturing new opportunities||Potential to gain exposure to regions, markets and industries of the future that are driving the low-carbon transition process. Funds that are focused on specific low-carbon themes are likely to deliver clear and demonstrable climate-related outcomes. Funds that integrate these factors into core processes but are not explicitly labelled funds may need to consider suitable metrics to measure climate-related impacts and outcomes (in line with the TCFD recommendations). The financial and climate-related outcomes will be highly dependent on the skill of the underlying investment manager(s) and/or the project teams.|
- Finance institutions invest €112 million into European Investment Bank’s Global Energy Efficiency and Renewable Energy Fund (GEEREF). The European Investment Bank (EIB) GEEREF is a developing market fund of funds, started in 2008 with public funding of €112 million from Germany, Norway and the European Union. It was established to catalyse private investment into its target markets. GEEREF raised an additional €112 million from institutional investors.
- The Dutch pension fund manager APG sets out to double its investments in sustainable energy generation from €1 billion to €2 billion. APG is expanding its infrastructure portfolio to at least €9 billion and prefers sustainable energy generation, including wind power, solar, hydropower and other energy-related infrastructure assets identified as being suitable from a risk/return perspective, provided the opportunities have visible cash flows, a strong sustainability profile and comparatively low exposure to government policy changes.
- Australian investment manager QIC enters into an A$800 million strategic renewable energy partnership with AGL Energy. The Powering Australian Renewables Fund (PARF) will be a A$2 billion to A$3 billion investor in more than 1,000 MW of large scale renewable energy projects in Australia. QIC and AGL will partner to develop, own and manage existing (brownfield) and new (greenfield) renewable assets under a governance framework to de-risk the investment.
- The Danish pension fund PKA increases its new and existing offshore wind farm investments to more than €1 billion. PKA believes that offshore wind investments align with its goal to generate a solid investment return, with long-term stable cash flows whilst also having a positive impact on the climate.
- US pension fund CalPERS exceeds its energy reduction goal of 20% in its core real estate portfolio. In 2004, the CalPERS Investment Committee established a goal of reducing the energy consumption of the underlying assets in its Core Real Estate portfolio by 20% by 2009. At the end of this five-year program, the investment managers exceeded this target, reporting a total energy reduction of 22.8%. CalPERS continue to work with its real estate mangers on improving the efficiency of its real estate portfolio.
- Australian superannuation fund Cbus invests over A$2 billion in building projects that reflect a strong commitment to sustainable development. Cbus Property is an in-house capability with a mandate to achieve at least a 5-star NABERS Green Star rating on all new commercial development as well as retro-fitting existing properties to improve sustainability. In 2017, it reported a 10% reduction in energy across its commercial portfolio, 14% increase in waste diversion and a 15% reduction in carbon intensity.
Battery pack prices continue to fall*
According to Bloomberg New Energy Finance research, lithium-ion battery pack prices will continue to drop in 2018, but at a slower pace than in previous years.
Cobalt and lithium carbonate prices reportedly rose 129% and 29% respectively in 2017. This will start to increase average cell prices in 2018, leading to many headlines about how the electric vehicle revolution and the rise of energy storage are under threat.
Despite this, BNEF expects average pack prices to decline by 10%-15%, driven by economies of scale, larger average pack sizes and energy density improvements of 5%-7% per year.
Falling capex costs, an increasing need for flexible resources and greater confidence in the underlying technology will continue to drive energy storage uptake.
*Source: BNEF, 10 Predictions for 2018
Electric vehicle sales growth*
According to Bloomberg New Energy Finance research, global electric vehicle (EV) sales will be close to 1.5 million in 2018, with China representing more than half of the global market. This will represent a rise of around 40% from 2017.
Europe is expected to hold its spot as the number two EV market globally. Urban air quality concerns are mounting in European capitals, and diesel’s demise will benefit the EV market. German EV sales doubled in 2017 and could double again in 2018.
North America should finish 2018 with EV sales of around 300,000.
*Source: BNEF, 10 Predictions for 2018
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How to invest in the low-carbon economy