31 August 2022 | Articles
In 2018, IRENA and the Climate policy Initiative (CPI) launched their first joint report, the Global Landscape of Renewable Energy Finance 2018, looking at trends in renewable energy investment during 2013-2016 broken down by technology, financial instrument and region.
The report found that private sources provide the bulk of direct renewable energy investment globally – over 90% in 2016 – with project developers accounting for about two-fifths of private investment in the sector. For the global energy transformation to unfold, key risks and barriers preventing investors to enter the renewable energy sector must be addressed. Additionally, large capital pools, such as institutional investors, which so far have been mostly dormant, must be activated.
Public investment flows
Although the private sector is expected to continue to provide the bulk of new renewable energy investment, public capital and support remain important to kick-start new markets and mobilise new capital sources.
The public sector plays a critical role in establishing an enabling environment for investing in renewable energy through policies measures and programmes. This can improve the risk–return profiles of projects, thereby increasing the sector’s attractiveness to private investors.
Governments can mobilise private investment by investing public funds in renewables, notably via multilateral and bilateral development finance institutions, national funds and other national finance institutions such as green investment banks. These public financial mechanisms can help inject initial financing into a nascent sector or relatively new technologies, engage in blended finance transactions with private providers of capital, assume investment risks to increase confidence for private investors, and lower financing costs.
Mobilising institutional capital for renewables
Institutional investors, i.e. pension funds, insurance companies, sovereign wealth funds, endowments, foundations and asset managers, can play an important role in scaling up renewable energy investment. This group manages well over USD 100 trillion of assets globally, with significant asset growth occurring in developing and emerging markets.
Renewable energy presents such investors with a unique opportunity to diversify their holdings, benefit from stable, long-term and strong cash flows that match their liabilities, fulfill their fiduciary duties, and minimize risks from stranded assets and adverse regulatory changes.
According to IRENA’s research, however, institutional investors have so far not taken advantage of opportunities presented by renewables, as less than a fifth of such investors have made any renewable energy investments, while only about 1.5% have invested directly in renewable energy projects.
Their current activities indicate a strong preference for indirect investments into renewables, although many are building internal capacities for direct project investments. Over time, institutional investors are showing an increased level of interest, largely owing to the growing competitiveness of renewables, search for higher yield by institutional investors, as well as the increasing availability of capital market instruments that allow for indirect investments into renewable energy, such as green bonds and green funds.
An integrative approach that combines effective regulations and policies (e.g. review of investment restrictions, clarification of fiduciary duties, support for sustainable finance), capital market developments (development of green securities and associated markets, and of bankable project pipelines) and internal changes (development of internal capacities, cooperation with other institutional investors) can lower existing barriers that this important investor group faces in renewable energy and catalyze their greater engagement in this sector.
Innovative capital-market instruments, such as green bonds, can open up crucial additional avenues through which investors can invest in renewables. Given the strong preference of institutional investors for indirect investments, ideally via listed and rated instruments, green bonds act as a bridge between such providers of capital and renewable energy assets.
According to the Climate Bond Initiative (CBI), the green bonds market has experienced a spectacular growth in the recent past, increasing from USD 36.6 billion worth of issuances in 2014 to USD 167.6 billion in 2018. In developed markets, investment in the energy sector is the second most common use of proceeds for climate-aligned issuers, while in the emerging markets, renewable energy dominates allocations from green bonds.
Given that global bond issuances amount to about USD 1 trillion per year, the green bond market has lots of room for further expansion. For this to occur, continuous effort needs to be put in the further harmonization of the green definition and certifications, collaboration among public and private stakeholders in the issuance process, and continuous development of a pipeline of bankable and de-risked renewable energy assets.