Institutional investors should consider 5% goal for clean energy exposure – report

Institutional investors should consider setting a goal such as 5% of portfolio-wide clean energy investments to send a powerful signal to the market, according to a major new report presented at the Investor Summit on Climate Risk hosted by the United Nations.

The report – Investing in the Clean Trillion: Closing the Clean Energy Investment Gap – contains 10 recommendations.

The 79-page document was written by Mark Fulton and Reid Capalino. Fulton is the former head of research at DB Climate Change Advisors who has just formed his own consulting firm, with former Deutsche colleague Mark Lewis, called Energy Transition Advisors. Capalino, also formerly with Deutsche, is now an analyst at the Carbon Tracker Initiative.

The recommendations – presented by sustainability advocacy group Ceres – are broken down into three elements: mobilize investors; promote green banking and debt capital markets; and policy reform (full listing below). The report builds on investment consultant Mercer’s investor-supported blockbuster Climate Change Scenarios report in 2011, which advocated a massive shift into climate sensitive assets.

“Institutional investors can help build market capacity for more institutional quality and scale investment products, strategies and opportunities by communicating their interest in increasing investments in this sector across multiple asset classes,” Fulton and Capalino say.

One way to do this could be by adopting a clean energy investment goal – such as 5% of total assets allocated to clean energy within a “reasonable time period”.

Announcing such goals, even as aspirations, would send a powerful signal to the market and stimulate the development of more institutional quality and scale investment products, they argue.

They estimate a 5% allocation would amount to $2.25trn of additional investment in clean energy.

For larger institutions the most attractive opportunities may involve direct and semi-direct investments in clean energy infrastructure (e.g. via project equity, project bonds, and pooled vehicles).

Developing capacity to source and execute such investments “should therefore be a priority for institutional investors, particularly for larger funds with $50bn or more in assets.”Smaller funds should focus on collaborating with larger investors and on developing expertise in evaluating clean energy fund managers. There was a “pivotal role” for external investment consultants here.

Another recommendation concerns asset-backed securities to expand debt financing. To get to scale, this market much overcome “growing pains”. Key steps here include: 1) minimize due diligence burden by standardizing power purchase agreement terms; 2) more stable cash flows; 3) more accurate rating/ pricing via more detailed historical data; and 4) limit downside risk through credit enhancement by banks.

Speaking at the event, Fulton said securitization was the way to get to scale in the debt markets. Packaged products were the answer given that a lot of investors can’t make direct investments: “We need vehicles, we need products.”

Christiana Figueres, Executive Secretary of the UN Framework Convention on Climate Change, called on investors to move out of high-carbon assets and into assets built on renewable energy and energy efficiency.

“Institutional investors who ignore [climate] risk face being increasingly seen as blatantly in breach of their fiduciary duty to their beneficial owners,” she said.

The 10 recommendations:
Mobilizing investors
1. Develop capacity to boost clean energy investments and consider setting a portfolio goal
2. Elevate scrutiny of fossil fuel companies’ potential carbon exposure
3. Engage portfolio companies
4. Support efforts to standardize and quantify clean energy investment data and products.

Green banking/debt
5. Encourage “green banking”
6. Support asset-backed securities
7. Support bank finance/technical assistance for emerging economies

Policy reform
8. Support regulatory reforms to electric utility business models
9. Carbon price/phasing out fossil fuel subsidies
10. De-risk deployment of clean energy sources and technologies