Institutional investors plan to almost double their allocations to renewable energy infrastructure in the next five years, according to a report by Octopus Group.
The Renewables and the recovery: accelerating investment in a post-pandemic world report showed that global institutional investor plan to raise the current 4.2% allocation to 8.3% in the next five years. This is expected to increase to 10.8% over ten years as the global response to climate change gains momentum, Octopus said.
The report, which was based on a survey, showed that 80% of institutions plan to increase their allocations to renewable energy infrastructure over the next three to five years.
However, the uncertainty and challenges caused by COVID-19 and the associated downturn have slowed the pace of divestment from fossil fuels, with investors on average divesting 4.5% of their overall portfolio in 2020, compared with 5.7%, it added.
The survey, conducted by CoreData Research in September by polling 100 institutional investors representing $6.9trn in managed assets, revealed that 86% of the respondents said the prevailing low-interest-rate environment and volatility in equity markets is pushing them to seek uncorrelated sources of higher yield.
Over half of investors point to stable and predictable cash flow as a reason to invest in renewables, and 48% cite the sector’s long-term yield outlook.
”In terms of drivers for investment, 78% of investors see pressure from millennials as boosting demand for renewables,” the report said.
Alex Brierley, co-head of Octopus Renewables, said renewable energy has proved an incredibly attractive asset class in the face of this year’s volatility, buoyed both by growing external pressures to invest responsibly, and by investors looking for long-term sources of yield.
“There is further progress to be made, however, and alongside renewables investment, divestment from fossil fuels also remains key. As gatekeepers to trillions of dollars, institutional investors have a critical role in fighting climate change.
“But to move the dial, investors have been clear that issues such as lack of government coordination, liquidity issues, and energy price uncertainty are standing in their way.”
Matt Setchell, co-head of Octopus Renewables, said: “We are facing two crises of unprecedented scale: the global pandemic and climate change. COVID-19 has radically impacted how we live, how businesses function and has forced governments across the world to act with urgency.
“Alongside these efforts, it is also critical that the longer-term threat of climate change remains a focus. COVID-19 can be the catalyst to a greener, more sustainable future, if governments, investors, specialist managers and energy companies are willing to work together.
“We are now at a crossroads and must seize this opportunity to build a global post-pandemic economic recovery that also opens up the renewable energy sector to attract the capital needed to tackle climate change. If we don’t act together, and if we don’t act now, it will be too late.”
To read the digital edition of the latest IPE Real Assets magazine click here.
