Renewables prove their pulling power in Q1-Q3

But a tug-of-war is unfolding between capital flowing into energy transition vehicles and real-life progress regarding climate change.

When it comes to sector-specific funds, renewables continue to reign supreme as we noted in our Q3 fundraising report, published yesterday. That’s probably no surprise for a couple of reasons. The first is that the sub-sector has been and continues to be a dominant investment theme, particularly since the pandemic; the second is that an increasing number of new funds either have an ESG or sustainability label attached to them. Or, in the case of European funds, an Article 8 or 9 classification under the EU’s Sustainable Finance Disclosure Regulation.

On that latter point, data from Morningstar shows assets in Article 8 and 9 funds reached $4.05 trillion at the end of December, representing 42.4 percent of all funds sold in the EU. While these figures are not specific to unlisted infrastructure funds, they do demonstrate the overall trend.

But while the whole ESG/energy transition/renewables theme is proving powerful in attracting investor capital, there is a tug-of-war going on outside the fundraising space that could affect action and progress. We’re talking about opposing trends, chief among them the anti-ESG legislation and practices taking hold in parts of the US.

At least two sources we’ve spoken to have dismissed the goings-on in the US as immaterial and of no consequence. We beg to differ and we’re not alone. Last month, Chris Ailman, chief investment officer of CalSTRS, the second-largest public pension fund in the US, expressed his concern in a media briefing about anti-ESG laws slowing the energy transition.

On the GP side, we’ve already seen firms such as BlackRock walking a tight-rope between their ESG commitments and holding on to their institutional clients after treasurers from several states – Louisiana, South Carolina and Utah – divested more than $1 billion in anti-ESG moves, though the divestments concerned asset classes other than unlisted infrastructure – at least for now.

But it’s not all about divestments. For example, when we asked Pat Reinhardt, senior investment officer for alternatives at the Iowa Public Employees’ Retirement System, in June about the pension’s appetite for investing in renewables funds, he responded: “[Our fund policy states] we’re not allowed to consider ESG criteria, so while we certainly don’t reject them out of hand, a renewable or green energy fund would have to compete on the same basis as other funds.”

One might argue this is just a US phenomenon. It is, but often, where the US leads, others tend to follow. Almost inevitably, these moves will embolden fossil-fuel lobbyists, leading to the slowing down effect Ailman referenced above.

A recent example is the European Commission calling on EU member states to approve the revised text of the Energy Charter Treaty, an agreement drawn up in 1994 as a means to protect foreign investments in the energy sector. That might have been a good idea at the time, but some 20-plus years later it has cleared the path for energy companies to sue European governments over climate-friendly policies. The revised text, which needs unanimous approval, continues to protect the fossil fuel industry.

According to Spain, the Netherlands, Germany, Portugal and France, which just this month began the process of withdrawing from the treaty, the ECT is an obstacle to meeting the Paris Agreement objective of limiting global warming to 1.5 degrees Celsius above pre-industrial levels.

Given the latest UN report published yesterday, which states that, should the world continue on its current trajectory, peak temperature in the 21st century is expected to rise between 2.1 and 2.9 degrees Celsius, we’re hard-pressed to see the logic in the EC’s stance.

Not for the first time, politicians are failing to act fast enough despite the clear urgency the climate emergency demands. Now some of them are threatening to interfere with the formidable amount of private capital being formed around the energy transition. We hope the industry can cut through the noise and continue to put that money to good use.