The concept of using energy from renewable sources is not new. Indeed, for the majority of human history the use of renewable energy has been the only option available. In the ages of antiquity, the sun and wind provided the energy to sustain life and the legends of antiquity tell of the Gods associated with these natural forces. The scientific age began with the Greeks, which included the developments in engineering as civilizations started to make use of natural energy.
The use of fossil fuels commenced in earnest with the dawn of the industrial revolution. Coal-powered locomotives and factories rapidly changed the landscape as humans commenced a reliance on fossil fuels for the next 200 years and which continues to this day.
Whilst the concept of renewable energy is not new, it has primarily only been in the last 50 years that widespread understanding of the damage from fossil fuels has been comprehended. Over a similar period, a number of advancements have been made with the efficiency of renewable energy technologies, such that today humans are positioned to be able to wean themselves away from fossil-fuel-based energy supply.
There is an increasing urgency with which this needs to happen in order to meet global climate goals.
The use of renewable energy supports our transition to a low-carbon future. Investment into clean energy technologies also helps mitigate financial and other risks associated with climate change. The evidence is beyond reproach and if we needed any further convincing, we just need to turn to Sir David Attenborough’s recently released ‘Witness Statement’. Sir David clearly articulates that divesting from fossil fuels and utilising the natural forces of solar, wind, geothermal, bioenergy and tidal are needed to power our society, as just one part of the equation to protect our planet and sustain our future.
There are many examples where the full spectrum of ESG factors have not always been adequately considered. Developments such as hydro-dams will provide effective renewable energy, but development has to be undertaken responsibly, considering the impact on local communities and wider human rights. Ensuring the holistic approach to such developments was the subject of an article by Fiona Reynolds, CEO, the PRI, and Phil Bloomer, Executive Director, Business & Human Rights Centre back in 2019.
For investors making investments into the energy sector, there are two trends worth noting:
The Coronavirus pandemic has amplified the volatility of the oil, gas and petrochemical sector, which has experienced significant contraction in market values, for a sector that had in recent years already started to underperform industry averages.
The renewables sector should be primed to step forward, having shown much more resilience through the downturn caused by the Coronavirus.
The return fundamentals have been positive and the demand should be approaching critical, but notwithstanding this dynamic, the pace of growth of the sector, and in particular the weightings in allocations to the sector have yet to grow at the rate needed to achieve the commitments of the Paris Agreement.
This situation is partly owing to the sector being relatively new. Institutional investors have been prudent with regards to the allocation to the sector, with concerns around investment liquidity. As with wider ESG investments and projects, the availability of comparable and quality information upon which to appraise competitors in the sector is playing catch-up.
Many of the largest global asset managers now have investment teams focused on infrastructure and renewables as a target investment, which is helping drive the sector to become more mainstream as an alternative asset investment class.
Renewable energy funds are now very prevalent. Solar farms and wind turbines are obvious examples, but there is real opportunity for managers to invest alongside Governments or large corporates to deliver on a renewable energy solution. For example, partnering with a national supermarket chain to deliver solar panel roofing and help that corporate institution deliver on its own carbon commitments. Investor returns are created from the selling of the renewable power either to an electricity provider or directly to a user, for example to the supermarket chain as mentioned above.
Power Purchase Agreements (PPAs) are used as the contract between buyer and seller for energy sales. PPAs in corporate arrangements are typically long-term (often 10 or 15 years) and thus provide both buyer and seller with financial certainty.
Notwithstanding the pandemic, there continues to be a strong flow of Corporate PPAs being signed as well as an increased focus on ESG initiatives and principles in the lead up to COP 26. Corporate PPAs really go hand in hand with wider ESG initiatives; not only does the entry into a PPA allow corporates to stabilise their electricity expenditure and utilise Renewable Energy Guarantees of Origins (REGOs) for their reporting purposes but also allows the evidencing of “additionality” (a frequent internal driver for corporates) in that a particular renewable energy project would not have been developed had it not been for the stable income generated under that PPA. We also frequently see corporates using the negotiation of the terms of a PPA to require the developer to implement certain ESG focused requirements into the developer’s wider supply chain, further demonstrating that this is increasingly a requirement for the whole life cycle of the project.”
In its World Energy Investment report for 2020, the International Energy Agency showed a rather disappointing flat trend in recent years, with global investment in clean energy and efficiency totalling US $600 billion each year since 2015.
A phrase used many times in 2020 is that “the Coronavirus has accelerated trends which were already taking place”, it has also shone a bright light on non-financial risks. Investment into renewable energy and the efficiency of energy delivery into homes and businesses is high on the wish list for the sector.
The immediate challenge for many will be that the impact of Covid-19 on economies and corporate balance sheets might reduce allocations to capital investment in the short-term, coupled with the over-supply caused by the lockdowns, which included the rather remarkable situation whereby the price of a barrel of oil turned negative earlier this year.
Many of us have paused for thought during the interruption of our daily routines caused by the global pandemic. Inevitably, our thoughts have turned to the future and how we mitigate the risk posed by these ‘black swan’ events such as pandemics and the increasing concerns around climate risks. Switching to renewable energy and divesting from fossil fuels seem to be obvious actions.
Sustainable investment is by its very nature long-term. As the weight of capital focused on ESG funds, impact investments and renewable energy increases, the infrastructure and projects will come to life. The weight of capital is increasingly coming from the man or woman on the street, as our understanding of the damage from fossil fuels has increased and we are motivated to switch energy provider or divert pension savings into more sustainable investments.
Simon joined Sanne in 2013. As Global Head of Real Assets, Simon is responsible for developing the product for Sanne's business. This encompasses working with the Country Heads to manage the suite of real assets services being offered, including into new markets and jurisdictions, driven by client needs and market trends. Real assets comprises real estate, infrastructure and renewable energy investments.
Prior to joining Sanne, Simon worked at a global financial services organisation where he was responsible for their financial reporting division, servicing funds investing into real estate, private equity and capital market assets. Simon started his career in the Audit & Advisory business of Ernst & Young.
Simon is a Fellow of the Association of Chartered Accountants of England & Wales and a Fellow of the Association of Accounting Technicians and currently sits on the Tax Committee of AREF.