Helene Winch, investment specialist at renewable energy investment company, Low Carbon shares her thoughts on divestment and why the finance community should look to make more responsible investments for a low carbon future, and for impressive returns.
Warren Buffet once said, “The investor of today does not profit from yesterday’s growth”. This utterance could not be more applicable to today’s diverse investment climate, where the widespread divestment ‘movement’ is gathering momentum and global recognition. Today’s investor needs to look ahead for growth opportunities and anticipate the impressive returns that are to be had from divesting stocks and equity from the fossil fuel sector, and reinvesting into renewable energy projects. It’s this mind-set that can help the UK create a low carbon economy for future generations.
It’s a matter of education
We only have to look through the papers of late to see the widespread attention that divestment is generating. High-profile individuals, governments and institutions such as the Church of England, Bill Gates, The Rockefeller Foundation and the Norwegian government have all vocalised their support for the divestment movement. Furthermore, it has been reported that altogether individuals and organisations responsible for at least $50bn in investments have said they intend to sell all or some of their fossil fuel investments. Such positive action and endorsement should not be underestimated, and can position divestment as an attractive weapon in the fight against global climate change.
Aside from helping to protect the environment, more needs to be done to prove that tangible financial returns are to be had by divesting from fossil fuels and re-investing into renewable energy projects such as large-scale solar farms and onshore wind projects, for example. The energy industry and investment experts can do more to educate institutional investors as to the significant, lower-risk returns that renewable energy projects can generate. This is a question of raising awareness as to these alternative investments that can improve the UK’s overall energy mix and carbon intensity and at the same time improve our energy security. After all, if we are to move to a low carbon economy, we need to invest more heavily in low carbon assets.
Proven technologies, proven returns
Make no mistake – renewable energy has a strong proven track record. Solar photovoltaic (PV) panels have been generating electricity for at least twenty years. The scale of solar PV projects and investment has significantly increased in that time, with corporate giants such as Apple realising the potential of investing in solar PV for its Silicon Valley HQ. Moreover, onshore wind power, also in its twentieth year, was described by the Department of Energy and Climate Change (DECC) as ‘the leading individual technology for the generation of electricity from renewable sources during 2014’. The statistics are clearly there for all to see – debunking the myth that renewable energy is too ‘new’, or ‘unproven’ a technology.
We have recently been experiencing a large drop in the price of oil highlighting its volatililty. One day an investor may be confident she/he will see an impressive return, the next oil sector share prices drop. Renewable energy, on the other hand, is not volatile in the same way. Solar panels and wind turbines generate electricity all year round – you may drill for oil, but you won’t always find it. And even if you don’t believe in climate change as an investor, these renewable energy investments can stand up for themselves financially. They are typically long-term, inflation-linked contracts, generating attractive, stable returns.
Renewable energy projects are more often than not analysed as part of the private equity industry sector, rather than a form of core infrastructure – another myth here for us to debunk. Investments in the solar and wind sector, for example, are predicted to be the best outperformers (between 0.5% to 3.5% additional annual returns) over the next 35 years. Perhaps not so surprisingly, coal, one of the main focuses of the divestment movement, is predicted to be the worst performer (between -1.2% to -4.9% additional annual returns). It’s worth noting, the positive annual returns from renewables is similar in scale to the negative from coal.
Most renewable energy projects are therefore, essentially infrastructure projects – the words ‘green’ or ‘renewable’ don’t often have to be mentioned at all. Moreover, over 40% of electricity demand has been met by renewable energy generation in recent years, which strongly suggests that renewable energy is a core, resilient electricity source that is here to stay.
The ’new age’ investors
According to a recent report – “Investing in a time of Climate Change” – commissioned by global investment consultancy firm, Mercer, we need institutional investors to take the on role of a ‘climate aware future makers’. These are pioneering investors who understand the impacts of climate change and can lead the charge in showing more risk-averse investors on how to invest into renewables. Future makers are those who realise that our FTSE 100 will not be dominated by BP, Shell or other fossil fuel stocks for ever, and that cleantech companies will slowly but surely creep onto this mainstream market. Finally, a climate aware future maker will look to apply the personal investments made in his/her personal life and apply this to his/her business life. “If I make such impressive returns with solar PV on my household roof for example, then how much money is to be made by investing in solar PV projects at scale?”
At present, there is no UK legislation in place that is motivating investors into investing in renewables. This is moving into effect in neighbouring France, with the government calling on institutional investors to disclose and measure the carbon intensity of their investment portfolio as well as informally in Scandinavia. I hope to see this call to action and level of engagement emulated by governments in the UK and across Europe – this will ultimately create a more mainstream and positive renewable energy investment environment for years to come. It will help to initiate more climate aware future makers for the task ahead.
The dawn of the divestment age
Divesting from fossil fuels and reinvesting in renewable energy has its clear benefits – it can help combat the negative effects of climate change whilst generating impressive, stable returns for our most pioneering and forward-thinking institutional investors. It’s not a gimmick to be dismissed, it’s not a myth. Investing in renewable energy presents strong growth opportunities now, and for future generations. In the UK, we are lucky to have some of the sharpest financial brains that are out there – no ‘problem’ is too big to solve. We hope to see more investors and financial institutions lead the charge in educating the industry on the true benefits of renewable energy investment in the thick of the divestment age.
http://www.ft.com/cms/s/2/5ca02a4c-8792-11e4-bc7c-00144feabdc0.html#axzz3hYmuUlDS and http://divestinvest.org/philanthropy/signatories/
 Estimated impact on sector returns compared to current expected returns of 6-7% per annum, second Mercer report, “Investing in a time of Climate Change”