Investors are viewing renewable energy assets as low-hanging fruit in terms of ticking off socially responsible lending concerns – an easy way to get environmentally friendly exposure in the private markets.
Many in the renewable energy industry have benefitted from riding on the coat-tails of the environmental, social and governance wave but bfinance private markets director Anish Butani says that is about to change.
Butani told delegates at Investment Magazine’s Infrastructure and Real Estate Conference that investors concerned with their ESG obligations will be offered attractive deals, as there is concern for environmental support from policyholders and a push to minimise climate-related risk.
“But as socially responsible investing matures, the ESG debate will intensify” and good ESG investing will demand much more commitment than merely creating clean energy, he says.
The private markets specialist said the sector was at a tipping point. “Being a good manager and dealing fairly with stakeholders will increase in importance,” Butani predicted.
Moreover, benchmarking of ESG will improve.
“ESG is a very nebulous concept and investors are still at the early stage of arriving at a consensus of what makes good ESG but it has become much more sophisticated.”
The conference also heard that the risk/reward spectrum for renewables has changed considerably – that it is no longer like a quasi-bond strategy.
And since returns in brownfield space have fallen, investors have been forced to move into greenfields territory. As a consequence, Butani argued, more managers are taking on a higher level of risk and venturing into new technologies.
Heightened risk appetite is one reason why Australia’s superannuation funds should examine renewable deals in Australia because of the low production costs compared to other energy sources.
This is the view of Tobias Reichmuth, chief executive and founder of SUSI Partners, who told conference delegates that improved economics and the low cost of solar power should encourage asset owners to look at these opportunities.
He told the audience that low returns in the past reflected the fact that funds invested in high-cost renewable energy projects where they carried full merchant risk (exposure to price fluctuations). Energy prices dropped and investors couldn’t get their money back.
“Australia produces cheap energy, it needs more energy and it will look to electric rather than fossil power,” Reichmuth said. “Moreover, if you invest today in a large modern solar/wind park, on the actual numbers, you are cheap in the market.”
He warned investors to avoid merchant risk by signing offtake agreements and selling energy at a fixed price for however many years they could negotiate.