Institutional direct investment has the best potential to bridge the financing needs for renewable energy, according to Climate Policy Initiative (CPI) - but the Australian investment industry may need to consider redesigning pooled investment trusts.
CPI said there were many renewable energy opportunities for institutional investors, but that super funds’ distinctive risk-and-return characteristics were often mismatched with the price that governments and consumers were willing to pay.
If the world was to move toward renewable energy, it required a significant amount of low-cost, long-term investment, CPI said.
Direct investment could resolve one quarter of renewable energy project equity and one half of the related debt required to 2035, according to CPI. However the skill and capital needed to build a specialist direct investment team restricted direct investment to the top 150 institutions worldwide.
CPI’s study found the Australian market lacked the scale to execute direct investment in renewable energy, but strong interest and an established infrastructure fund sector led it to explore other ways to help finance renewable energy investment.
Although defined benefit models were more conducive to long-term investments such as infrastructure, CPI found several funds had 25-40 per cent of their portfolio in illiquid assets.
Additionally, it found Australian super funds had among the highest allocations to infrastructure at about 10 per cent.
It said the industry should redesign the parameters for pooled investment vehicles.
CPI found that the experience with pooled investment trusts and renewable energy investment had been mixed, with some institutions concerned with high fees and an uncertain cash flow profile.
It said better pooled vehicles were needed to create liquidity, increase diversity and reduce transaction costs while maintaining the link to underlying cash flows.
Interestingly, Industry Funds Management (IFM), the investment arm of 30 not-for-profit funds, established a direct investments team last November to seek out opportunities in the $250-500 million range. The global investment manager has over A$44 billion in assets under management.