Institutional investors plan to almost double portfolio allocations to renewable energy with almost $210bn to flow into the sector over the next five years, according to a new report from Octopus Group.
The report – ‘The green investor: why institutional investing holds the key to a renewable energy future’ – surveyed global institutional investors with a collective $6.8 trillion of assets under management.
It found that allocations to renewables will increase to 7.1% over the next five years from 4.4%.
More than two-fifths of institutions currently invested in renewables, expect to increase allocations by as much as 10%, the report added.
Two-thirds of investors said one of the reasons for choosing clean power was diversification, while 58% also cited environmental, social and governance reasons.
Predictable cash flows was highlighted by 48% of investors surveyed.
The report also noted a number of challenges impacting investor appetite for the sector.
Energy price uncertainty was noted by 56%, liquidity issues by 41% and lack of scale by 34%.
A further 34% cited operating, implementation and execution costs as a challenge, while 33% noted government and regulatory barriers.
The biggest factor (52%) in causing more investment in renewables would be better support and policies, the report said.
Octopus co-head of energy investments Matt Setchell said: “Institutional investors are waking up to the investment opportunity that comes with securing a renewable future.
“However, while institutional investors’ contributions are on the increase there remains a long way to go to plug the funding gap.
“We cannot afford to view increased allocations as ‘job done’. More needs to be done to unblock investment to help tackle climate change. Acting now is not an option; it is a necessity.
“Our report identifies the key barriers that need to be overcome to enable institutional capital to support a renewables future.
“Clarity on policy from government; flexible investment opportunities to suit investor needs and skilled managers who are able to identify and offset risks will be crucial to unlocking further institutional investment into the sector.”
Octopus made three recommendations to boost institutional investment in renewables.
First, investors need to be educated on the underlying risks, particularly energy price uncertainty so that they understand how market fluctuations may impact their returns.
Second, risk can be mitigated through a team of specialists that reduce both operational and commercial risks alongside using existing scale to benefit investors.
Third, more choice could be created by tailoring investments into renewable energy assets to combine assets across technologies, jurisdictions and energy price exposure to fit different risk-return appetite from investors.