The Challenge of Institutional 

                                      Investment in Renewable Energy

CPI Report

Climate Policy Initiative

David Nelson

Brendan Pierpont

March 2013

Climate change presents risks to the global economy and

the assets of investors worldwide, but efforts to address

climate change may create opportunities for investors

to enhance the performance of their portfolios through

investment in clean energy solutions. A move toward

renewable energy sources will require significant long-

term, low-cost investment. Policymakers, faced with

fiscal constraints and a still-recovering financial system,

have begun to look to institutional investors – principally

pension funds and insurance companies – to provide the

long-term, low-cost capital needed to meet this challenge.

At the same time, investors are looking to policy makers

to create greater investment certainty and improve the

risk-adjusted returns available in the sector.

The investor groups that make up the Global Investor

Coalition on Climate Change (GIC) and UNEP Finance

Initiative (UNEP FI) together represent global institu-

tional investors responsible for over $22 trillion in assets.

We supported the Climate Policy Initiative (CPI) in this

project, providing access to our membership and feed-

back on this research, as they investigated the barriers to

institutional investment in renewable energy. We believe

this report makes an important contribution to the efforts

to facilitate increased investment in renewable energy

projects.

CPI’s research demonstrates the challenges and oppor-

tunities for institutional investment in renewable energy.

The long-term investment horizons of many institutional

investors may be well-matched to the profile of renewable

energy assets, and by making these investments, institu-

tions could enhance the performance of their portfolios,

lower the cost of capital for renewable energy, or some

mix of the two. However, institutional investment is con-

strained by climate, energy, fiscal and investment policies

as well as the practices of investors themselves. These

constraints limit the potential for institutional investors

Executive Summary

With national budgets tight, policymakers look to private

capital as a key source for funding energy and climate

change related infrastructure. The big prize is institutional

investors — pension funds, insurance companies, and

other long-term investors — whose $71 trillion in assets

form one of the largest pools of private capital in the

world, leading policy makers to ask whether institutional

investors could help meet the climate change funding

challenge. In this paper we explore a particularly inter-

esting component of that challenge, that of institutional

investment in renewable energy.

Our analysis shows that given enough attractive invest-

ment opportunities and reduced policy barriers, insti-

tutional investors could become a significant source of

capital for renewable energy. However, our research also

suggests that, for the developed world, there is not a

shortage of potential investment in renewable energy;

rather there may only be a shortage of opportunities at

the price — and level of risk — that governments and

energy consumers are willing to pay. Institutional inves-

tors, with their distinctive risk/return requirements and

longer-term objectives, might invest in renewable energy

projects at lower returns (and thus prices) than other

investors seeking shorter-term gains. Thus, the question

becomes whether institutional investors have the poten-

tial to bridge the financing gap more cost effectively, and

what would be needed to make this happen.

To map this potential and identify the barriers to achiev-

ing it, we interviewed more than 25 pension funds and

insurance companies across North America, Europe, and

Australia, as well as their consultants, bankers, renewable

project developers, analysts, and academics. We ana-

lyzed their investment portfolios along with global and

national data on institutional investors to supplement our

interviews. Our analysis compared potential investment

from institutions to renewable energy investment needs

over the next 25 years, as estimated by the International

Energy Agency (IEA).

These discussions and analyses indicate that the potential

impact of institutional investment is highly dependent on

how the investment is made. We identify three channels

for investment in renewable energy, each of which can

come in different forms, such as equity/company shares

or loans/bonds:

• Investment in corporations is the easiest

investment path for most institutional investors,

whether through equity shares or corporate

bonds. Our analysis indicates that institutional

investors could easily provide corporations with

all of the corporate equity and debt that corpora-

tions would need to fund their share of renewable

energy for the next 25 years. But corporations

make investment decisions based on their own

strategy and financial considerations. Thus,

institutional investment in corporations with

renewable energy in their portfolios may not

encourage these companies to increase their

share of renewable energy, unless the relative

attractiveness of these renewable energy projects

is superior to other potential investments from

a corporation’s point of view. Furthermore, there

are relatively few pure-play renewable companies.

Therefore, institutional investment in corporations

will do very little to change the current renewable

energy financing dynamics, and is unlikely to

contribute to lower financing costs for renewable

energy.

• Direct investment in renewable energy projects

is the most difficult for institutional investors. The

skills and expense required to make these invest-

ments are likely to limit direct investment to the

largest 150 or so institutions, while the illiquidity

of these investments — the ability to sell the asset

at a minimum loss of value if unexpected cash

needs arise — limits direct investment, even for

those large investors who have developed direct

investment capabilities. We estimate that these

institutions could provide, at most, roughly one

quarter of the renewable energy project equity

investment and one half of the related debt

required between now and 2035. That having

been said, direct investment in renewable energy

projects creates an opportunity for institutions

to improve their risk-adjusted return, by taking

advantage of their size, sophistication, lon-

ger-term investment horizon and in some cases

an ability to accept some illiquidity, while poten-

tially lowering the cost of capital for renewable

energy.

• Pooled investment vehicles or investment

funds vary in fit and accessibility for institu-

tional investors. A large, publicly traded pooled

investment fund could eliminate both the liquidity

and size constraints; however, like corporate

investment, it could also reduce the connection

to underlying project cash flows and therefore the

potential cost of capital advantage for renewable

energy. Other fund designs could offer a better

connection to the underlying assets — for

instance by offering a “buy and hold to maturity”

strategy, where the fund agrees to hold an asset

for its life in order to deliver predictable cash

flows — but in so doing may sacrifice their ability

to offer liquidity. So far, the experience with

pooled investment vehicles has been mixed, with

some institutions concerned about high fees and

the uncertain cash flow profiles on offer.

Barriers to achieving investment potential

While direct investing has the greatest potential to lower

financing costs, even the one-quarter to one-half poten-

tial will be very difficult to achieve. The reality is that a

series of barriers, including energy policy, financial regu-

lation, and investment practices within the institutional

investors constrain their ability to invest in renewable

energy, and may keep the investment potential from being

reached.

The investment case for renewable energy almost

always has a significant policy element, while the

institutions are themselves subject to their own set of

regulations. Three types of policy discourage institutional

investors:

1. Policies that encourage renewable energy, but in

ways which discourage institutional investors;

for example, the use of tax credits as an incentive

mechanism in the U.S. discourages investors like

pension funds that are tax exempt and for whom the

credits may have less value.

2. Policies addressing unrelated policy objectives

which unintentionally impede institutional investors

from renewable energy investment; for example, in

Europe, policies intended to ensure the functioning

of energy markets make investors choose between

renewable energy generation and the transmission

assets they may already own.

3. Energy policy and renewable energy specific policy

that is lukewarm, or inconsistent and creates

perceived policy risk; for example, retroactive tariff

cuts in Spain or start-stop expiration of incentives

in the U.S. create an aura of uncertainty that makes

institutions ponder whether building a team to invest

directly in renewable energy will make economic

sense in the long-term.

Maintaining secure pension funds and insurance poli-

cies is an important limitation on direct investment. The

primary objective of institutional investors is to provide

services such as pensions and life insurance at reasonable

costs, with a very high degree of certainty. These inves-

tors must maintain appropriate levels of liquidity, trans-

parency, diversification, and risk to maintain this certainty.

Financial regulation codifies these requirements, and in so

doing may limit direct investment or in other ways impact

the attractiveness of direct renewable energy investment.

Investment practices of all but a few of the institutional

investors are only beginning to catch up with the oppor-

tunities available. Many pension funds will not invest

directly in any illiquid assets, while many others have not

built the specialist investment expertise to invest directly

in renewable energy.

National pension policy varies widely between countries,

so the funds available to invest in renewable energy

are unevenly distributed. Ninety percent of the pension

assets in the OECD are concentrated in just six countries,

and even within these countries the size and style of the

funds vary, leading to different investment potentials.

Insurance assets are more evenly distributed across

countries.

To provide one quarter to one half of required renewable

energy project investment, institutional investors would

need to rapidly expand the role of direct investment, build

out direct investment teams (in large institutions), and

be willing to allocate more of their capacity to accept

illiquid investments — in exchange for higher returns — to

renewable energy projects.

Five steps could help reach institutional

investment potential

Based on our analysis, we identify five steps that could

help to overcome these barriers and enable institutional

investors to meet their potential to invest in renewable

energy projects.

1. Fix policy barriers that discourage institutional

investors or investment funds. However, many of

the policy barriers exist to achieve important policy

objectives outside of encouraging institutional

investment. Thus fixes need to consider the value

of increasing institutional investment versus the

cost of implementing fixes. In some cases, appropri-

ate exemptions or specific policies may encourage

institutional investors.

2. Improve institutional investor practices. However,

changing some practices, like increasing the tolerance

for illiquidity and building direct investment teams,

could impact both the risk profile of the institutions

and the culture of their organization, which also

requires careful consideration. We find that building

this capacity may be difficult for institutions with less

than $50 billion under management.

It is unclear whether these two steps would encourage

enough institutional investment to lower renewable

energy costs significantly. Thus, several additional actions

could be taken to encourage renewable energy invest-

ment from institutions:

3. Identify whether any regulatory constraints to

renewable energy investment by institutional

investors can be modified without negatively

impacting investors’ financial security, solvency

or operating costs. In some cases, the regulation of

pension funds or insurance companies themselves

constrains investment in renewable energy projects.

Generally, this regulation is structured to ensure

the solvency and security of the pension funds and

insurance companies; therefore we see little room

for major improvements. Any modification of these

policies to encourage renewable energy investing

must be carefully weighed against impacts they might

have on the financial health of institutional investors.

4. Develop better pooled investment vehicles that

create liquidity, increase diversification, and reduce

transaction costs while maintaining the link to

underlying cash flows from renewable energy

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This BLOG  looks at pensions and their impact on what are called Public Private Partnerships or P3’s these are not really about private funding at all but about two streams of public funding, pensions and government with private capital a third partner.

We will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies. 

Finally taking the long view we will show how these funds are forms of evolving social capital that is dominating private capital as we evolve into socialization of capital. 

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