Global institutional investors plan to almost double the allocation to renewable energy infrastructure in the near-term, according to a new report from Octopus Renewables.
The allocation is expected to increase to 8.3% of their overall portfolio in the next five years, from 4.2% currently, rising to 10.8% in 10 years.
The findings in the ‘Renewables and the recovery: accelerating investment in a post-pandemic world’ report are based on a survey of institutional investors representing $6.9 trillion under management.
Among this sample alone, planned investment in renewables will see $742.5bn move into the sector over the next decade, the report found.
It said 80% of institutions plan to increase allocations to renewable energy infrastructure over the next three to five years.
However, the uncertainty and challenges caused by Covid-19 and the associated downturn have slowed the pace of divestment from fossil fuels, with investors on average divesting 4.5% of their overall portfolio in 2020, compared with 5.7% forecast for 2020 in Octopus’ 2019 survey.
Investors have significantly cut their planned rate of divestment, expecting to divest 5.2% over the next five years and 8.6% over 10 years, down from the 14.4% and 15.6% forecasts provided by investors for the same time periods in the 2019 survey, Octopus said.
It added that renewable energy assets have remained resilient during the pandemic, with 50% of investors saying clean power has become more attractive during the crisis and associated downturn for several reasons.
Some 86% of institutional investors globally said the prevailing low interest rate environment and volatility in equity markets is pushing them to seek uncorrelated sources of higher yield.
More than half (53%) of investors point to stable and predictable cash flow as a reason to invest in renewables, and 48% cite the sector’s long-term yield outlook.
In terms of drivers for investment, 78% of investors see pressure from millennials as boosting demand for renewables.
However, the report identified several barriers to unlocking further investment in the sector as institutional investors navigate the impact of the Covid crisis and the increased volatility in global financial markets.
Liquidity concerns have risen up investors’ agenda and are seen as the biggest challenge for global investors (43%) compared with only 19% of investors citing this as an issue in 2019.
This is followed by energy price uncertainty (38%) and a lack of renewables skills and resources (28%).
Over half (52%) call for greater access to specialist renewable managers to invest or manage assets on their behalf, signalling the need for managers to create a broader range of renewable investment products to encourage further sector investment.
Octopus Renewables co-head Alex Brierley said: “Renewable energy has proved an incredibly attractive asset class in the face of this year’s volatility, buoyed both by growing external pressures to invest responsibly, and by investors looking for long-term sources of yield.
“There is further progress to be made however, and alongside renewables investment, divestment from fossil fuels also remains key.
“As gatekeepers to trillions of dollars, institutional investors have a critical role in fighting climate change.
“But to move the dial, investors have been clear that issues such as lack of government coordination, liquidity issues, and energy price uncertainty are standing in their way.
“Alongside governments, specialist energy fund managers, like ourselves, need to ensure we make investments more accessible and encourage greater investment in renewables and divestment of fossil fuels.
“We also recognise that there will be multiple routes to market and that investors will be at different stages of the journey.
“But understanding of the asset class’ ability to provide stable, long-term returns, while helping save the planet is growing. It is critical we use this momentum to drive further positive change.”
Octopus Renewables co-head Matt Setchell said: “We are facing two crises of unprecedented scale: the global pandemic and climate change.
“Covid has radically impacted how we live, how businesses function and has forced governments across the world to act with urgency.
“Alongside these efforts, it is also critical that the longer-term threat of climate change remains a focus.
“Covid-19 can be the catalyst to a greener, more sustainable future, if governments, investors, specialist managers and energy companies are willing to work together.
“We are now at a crossroads and must seize this opportunity to build a global post-pandemic economic recovery that also opens up the renewable energy sector to attract the capital needed to tackle climate change.
“If we don’t act together, and if we don’t act now, it will be too late.”