With the signing of a historic climate agreement in Paris just before the end of 2015, it only seemed appropriate to dedicate a good portion of our first issue of the year to clean energy infrastructure investment.
As we reported in our initial coverage of the 21st Conference of Parties (COP21) – parties refers to the countries that signed up to the 1992 United Nations Framework Convention on Climate Change – the agreement may not be perfect, but it is historic nonetheless.
As Eugene Zhuchenko, executive director of the Long-Term Infrastructure Investors Association (LTIIA) told Infrastructure Investor in its aftermath: “Reaching an economically sensitive deal on a scale that involves 195 different governments in itself is an outstanding success.” Moreover, those 195 countries are responsible for about 95 percent of global greenhouse emissions.
One of the agreement’s weakest points – and the one which has drawn the most criticism – is that it is not legally binding. Part of the blame can be placed on the US. “One of the things I understood to be an issue at these [COP21] meetings was that the kind of agreement the countries could come to was limited because they knew that if it had to be ratified by the US Congress, it would never get through,” Peter Victor, a professor of environmental studies at Toronto’s York University, explains.
“There was no point in having every other country in the world agree to something that would get shot down in the US. I’m not saying that the US is the only country that may have favoured a non-binding agreement. But certainly because of the weight the US carries, it counted the most,” he argues.
Despite its non-binding nature, the good news, as Zhuchenko points out, is that the agreement is not simply a declarative one but is actionable, including concrete accountability and implementation mechanisms. Each signatory has formulated plans – Intended Nationally Determined Contributions (INDCs) – demonstrating how they propose to fight climate change.
“Accession to the Paris agreement creates peer pressure on each participating country to deliver [on the] pledges made in those plans,” Zhuchenko notes. “The peer pressure and other incentives in the corporate world for greener operations and investments have been increasing steadily over the last 10 years,” he adds, referring to initiatives such as sustainability accounting and the scoring by the United Nations – Principles for Responsible Investment (UN-PRI) initiative.
This trend can be witnessed by the increasing number of institutional investors and fund managers that are placing a greater emphasis on environmental, social and governance (ESG) programmes.
In the US, for example, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) – the two largest public pension funds in the country – have been taking action well before the Sustainable Innovative Forum was held in Paris.
In September 2014, CalPERS signed the Montreal Carbon Pledge, committing not only to measuring and publicly disclosing the carbon footprint of its investment portfolio, but also using this data to set portfolio carbon footprint reduction targets. The $288 billion pension fund is also one of 10 institutional investors that pledged to invest in climate-resilient infrastructure.
CalSTRS, on the other hand, has said it will more than double its investment in clean energy from $1.4 billion in 2014 to $3.7 billion by 2019. Last September, the $184 billion fund became lead investor in the Energy Productivity Index for Companies, a project to establish the first global energy productivity benchmark for listed industrial companies.
These examples, as well as the growing number of limited and general partners signing up to UN-PRI from approximately 200 in 2006 to about 1,400 currently, demonstrate that the private sector has not been idle in the fight against climate change.
“Five years ago we decided to invest directly in infrastructure focusing specifically on clean energy because we think that is the future. The positive outcome of COP21 is a further validation of our strategy” commented PensionDanmark chief executive Torben Moger Pedersen.
According to Christian Doglia, who in 2013 founded Stockholm-based infrastructure investment firm Infranode, along with Philip Ajina and Leif Andersson, Nordic investors have always been at the forefront of making sure that cleantech and renewable energy investments were part of their investment process.
CLEAN ENERGY FIRST
While Doglia says Swedish pension funds have been under-allocated to infrastructure, there are several instances of institutional investors that went from having a zero allocation to infrastructure to investing millions within months – and, importantly, doing that by jumping straight into clean energy infrastructure investment.
An example is AMF Pensionsförsäkring, which Infranode advised. Last October, the Swedish pension fund made its first infrastructure investment by committing £300 million (€389.47 million; $425.76 million) to the Green Investment Bank’s offshore wind fund, in the UK. Two months later, AMF paid £237 million for a 49 percent stake in the 150-megawatt(MW) Ormonde offshore wind farm, also in the UK.
Asked why AMF chose clean energy as its first infrastructure investment, Doglia replies: “It’s two things. One, is that this investment allows an investor like AMF, which has more than €40 billion of assets under management, to deploy large amounts of money fairly quickly. With a very large amount of their portfolio invested in fixed income, it’s not enough [for large investors] to make investments of €50 million to make a difference in terms of diversifying their portfolio. The second reason is the sustainability targets of these investors.”
According to Doglia, many Swedish investors are signatories of the UN-PRI initiative, the European Social Investment Forum or its Swedish counterpart Swesif. “A number of these investors have quite defined and strict sustainability policies that not only apply to themselves, but also to those who work with them as an investment manager, advisor or consultant,” Doglia explains.
Infranode’s co-founder also cites AP3 as an example of a Swedish pension fund that increased its infrastructure allocation from zero to €1 billion in a matter of months. AP3, along with AP1, was part of a consortium that last March agreed to acquire Fortum Distribution, the Swedish electricity distribution business of Finland’s Fortum, for SEK60.6 billion (€6.5 billion; $7.1 billion).
“I think COP21 will definitely spur them into doing large investments in renewables, cleantech and green bonds,” Doglia remarks, referring to the AP funds.
Standard & Poor’s (S&P) expresses a similar view but on a global scale. “We believe that as a result of the Paris agreement, the market for renewables, cleantech, and green finance could take off,” the ratings agency wrote in a January note. “The pledges from China and India alone could double the world’s wind and solar capacity within 15 years,” S&P states.
Over the following pages, we take a look at how clean energy investment is taking place in some of the world’s most promising markets – and what that means for infrastructure investors.
In New York State, energy ‘tsar’ Richard Kauffman tells us about the pioneering work he is doing to reform the grid – and utilities – to accommodate ever larger amounts of distributed energy. On the other side of the world, Japan offers a good example of what happens when the grid is not reformed, with the country’s solar boom expected to fizz out after 2017 on account of grid bottlenecks and other obstacles.
India would do well to learn from Japan’s problems and we find that investors have grid concerns over the government’s ambitious targets to increase solar and wind capacity to 100 and 60 gigawatts (GW) respectively by 2022, up from a current low of 4GW and 20GW. Closer to home, the appeal of offshore wind is on the rise across Europe.
As stated before, the Paris agreement may have its flaws, but its strong points cannot be overstated. Achieving the signatories’ nationally determined contributions alone will require an estimated $16.5 trillion of investment over the next 15 years, according to the International Energy Agency.
“We believe that given the right incentives, market mechanisms, and policies, this transition could happen and at a far quicker pace than many expect,” S&P’s head of environmental and climate risk research Michael Wilkins asserts. Infrastructure investors would do well to get ready for it now.