European institutional investors are taking a pragmatic approach to investing in renewable infrastructure that favours performance over SRI-related factors, according to new research by Aquila Capital.
Almost two-thirds (63%) of respondents cited portfolio returns as the main reason for investing in renewables compared to just 6% who do so for environmental and ethical reasons. Diversification and inflation-hedging was identified by 12% and 9% of investors respectively as their primary driver for gaining exposure to renewable infrastructure.
The majority (52%) of European institutions have some exposure to renewable infrastructure and currently allocate an average of 4% to this asset class but the study suggests these figures are set to rise. Nearly seven in 10 (69%) investors expect institutions to increase exposure to renewable infrastructure over the next three years, including 14% who believe the increase will be ‘significant’.
Over two-thirds (68%) of investors say they are positive about the outlook for investment in renewable infrastructure, including 14% who are ‘very positive’; only 14% are ‘somewhat’ negative. Investors’ biggest concern about renewable infrastructure is ‘the experience and track record of the managers of the assets’, cited by 51% of respondents.
Roman Rosslenbroich, CEO of Aquila Capital, says: “This research clearly shows that investors are drawn to renewables by the attractive returns they can offer. The findings reflect our own experience: we are seeing increased demand for renewable infrastructure from institutional investors, as reflected by our €500 million hydropower partnership with APG formed this summer.
“Diversification sits at the centre of most successful portfolios so investors should aim to spread their allocation across different asset types, regulatory frameworks and electricity price structures. Doing so can be a complex task, as many factors need to be considered to ensure that investors have a combination of projects that delivers attractive risk-adjusted, long term returns. This is a rapidly evolving sector that is exposed to political and regulatory pressures and therefore requires a highly active asset management approach.”
For those institutional investors who have invested in renewable infrastructure in the last three years, photovoltaics has delivered the best results overall, with 39% saying the subsector had met or exceeded expectations, closely followed by 33% for wind power and 30% for both hydropower and biogas.
Wind power is set to lead renewables in generating increasing interest over the next three years: nearly two in three (64%) institutional investors say their peers will increase exposure to the subsector, with 15% saying the increase will be ‘dramatic’; more than half (53%) expect institutional investors to increase their exposure to biogas, 50% to photovoltaics, 35% to hydropower, 42% to geothermal and 37% to tidal.
Direct ownership and specialised funds are the most favoured form of vehicle to invest in renewable infrastructure (29% each), followed by closed-ended funds (24%), club deals/co-investments (9%) and managed accounts (3%).
