The development of better pooled vehicles could be one way of boosting institutional investment in renewable infrastructure, according to a major new study from the Climate Policy Initiative, the San Francisco-based think tank.
Financial markets should adapt and “bridge the gap” between direct investment in projects and investment in companies, the report argues. But it acknowledges that the experience with pooled vehicles has been mixed, with institutions concerned about high fees and uncertain cash flow.
The study finds that if all policy barriers were removed and investors optimized their investment practices, institutions could supply up to a half of the investment needed to fund renewable energy projects through to 2035.
But the report finds that pooled renewable investment funds “distort” the economics of projects for an institutional investor. Issues include leverage, hedging out inflation risk, portfolio churn, re-investing cash flows and high fees.
“As a result of the packaging and design, increasing leverage, and reinvesting dividends, the pooled investment vehicles no longer offer risk/return and cash flow profiles adequate for liability matching, and as such become return seeking,” the study says.
The report lays out some of the fund characteristics needed to increase institutional participation: deal flow,expertise, low transaction costs, monitoring, liquidity and liability matching and predictability.
“The funds are likely to have a buy and hold to maturity mentality, and may offer differ maturity profiles to fit with different investors,” it is suggested.
The 92-page report – The Challenge of Institutional Investment in Renewable Energy – was written by David Nelson and Brendan Pierpont.
“The funds are likely to have a buy and hold to maturity mentality”
It says the largest 150 or so institutional investors have the biggest opportunity to affect the cost of financing renewable energy by directly investing in project equity or debt.
The CPI also suggests removing policy barriers to institutional investment in renewable energy, improving investment practices at the institutions themselves and strengthening corporate investment in renewable energy.
“Our analysis shows that given enough attractive investment opportunities and reduced policy barriers, institutional investors could become a significant source of capital for renewable energy,” the authors state. They interviewed more than 25 pension funds and insurance companies and other players across North America, Europe, and Australia.