Institutional investors key to a global net-zero ?

1. What are institutional investors (II)?

- Pension funds

- Sovereign wealth funds

- Insurance funds

- Foundations and endowments

Pension funds constitute the biggest pot among II, whereas Foundations and endowments are around 2%.

2. The main reason for II investments in Energy Transition (ET) is economic and diversification. Sustainability and climate change are low in the ranking while making investment decisions. However, this is slowly changing with time, especially when II have pledged to move towards non-fossil fuel investments

3. Current II stands around 87 trillion dollars (yes trillion 😊) and currently, only 1% of these investments are going in ET and green infrastructure.

4. II mainly invest in three categories

-funds who invest in ET or

-indirect investments like Green bonds

-direct investment – very rarely, only 1%

5. II mainly invests in secondary investments, where no further development is required. They rarely invest in green or brownfield projects.

6. Why II are key to net-zero goals?

-Several countries have new regulation which requires II to declare their GHG emissions and has mandatory to reduce exposure to Fossil fuels e,g, Norward 1.1 trillion dollar SWF have announced to reduce its fossil fuel exposure to zero

-As the world moves towards 2 degrees or higher in the coming years/decades, II has a high risk of exposure to stranded assets. The value of fossil fuel assets goes down with the increasing risk of climate change and on the other hand, RE assets value goes up. II exposure in the fossil fuel assets is significantly high (in trillions of dollars) and will become stranded assets in coming years.

-II are also known as patient capital as they require moderate returns over a long period. Unlike fossil fuel assets, where input cost like coal varies a lot, RE assets have more stable input costs like solar and wind and hence the returns are more stable. This is exactly in line with the philosophy of II

-With the lowering interest rate regime and limited growth rate in developed countries, II has more avenues in investment in ET assets in developing countries. The average size of an RE plant in Asia and Africa is from 50-100 MW vs 25-50 MW in developed countries. Also, the expected IRR in ET assets from Asia and African is between 8-10% against 3-5% for developed countries.

Why II are still not investing in ET assets in developing countries? What can be done to increase these investments with a case study? To be discussed in the next article……