Climate change and decarbonization objectives are driving governments and investors to consider clean energy investing. But do investments in clean energy make financial sense? This is the question that a series of joint publications by the International Energy Agency and Imperial College London have sought to answer. Our aim is to establish greater financial transparency and provide more data to help financial institutions and policymakers participate in the energy transition.
The first two reports investigated the financial performance of clean energy assets across a range of listed markets. Over a ten-year horizon, a publicly traded portfolio consisting of renewable power assets has generated generally higher investment returns and exhibited higher diversification benefits (meaning that performance was less correlated to the overall market) than a portfolio consisting of fossil fuel companies.
The renewable portfolio also exhibited lower volatility in some regions and displayed greater resilience than other energy investments, especially during the market downturn triggered by the Covid-19 pandemic. These findings held across a variety of markets examined, although the indices for fossil fuels picked up considerably in 2021 as the economic recovery boosted demand and prices.
With supportive investment performance and an accommodative policy backdrop, investments in renewable power have increased rapidly over the past decade. These investments totalled 360 billion USD in 2021. However, only a relatively small share of this investment has come from equity fundraising by publicly listed, pure play renewables companies. Most investments were carried out by diversified listed companies (such as utilities) and via unlisted companies and assets.
Public markets alone did not provide the breadth of clean energy investments required to meet climate targets. This is exacerbated in emerging markets and developing economies due to their underdeveloped capital markets and insufficient investments. To ensure sufficient clean energy investments, investors and policymakers need to tap into private markets. However, information gaps and short-termism continue to cause challenges for investors to originate and invest in clean energy assets.
Investor participation is restrained by the limited availability of transparent and reliable data on unlisted asset returns, as well as asset specific and macro-financial risks. Understanding the investment case for these unlisted assets is an important aspect of the broader energy transition. In our third joint report, we turn our attention to unlisted renewable assets to address these concerns. We examine their risks and returns globally, including in emerging markets and developing economies. Our analysis will cover the performance of an index representing global unlisted renewables consisting of wind, solar, hydropower, and other renewable assets (biomass, geothermal, marine power, and battery storage).
Wind assets, largely onshore wind, accounted for more than half of the portfolio constituents, with solar and hydropower each comprising one-fifth. We compared this with a broader unlisted infrastructure portfolio that included assets across a range of sectors, such as transport and telecommunications, as well as with various other portfolios and benchmarks.
We found that the unlisted renewable assets outperformed the broader unlisted infrastructure assets, as well as the listed market benchmark, MSCI ACWI, over the past ten years at a diversified index level. Unlisted renewables exhibited lower volatility than unlisted infrastructure and the listed market benchmark over the past ten years at a diversified index level. Both unlisted portfolios provided diversification benefits during credit events and against changes in commodity prices.
Macroeconomic conditions, such as inflation and interest rates, seem negatively correlated to unlisted renewables although the relationship weakens in a higher interest rate environment. These results suggest that while both unlisted portfolios can provide attractive risk-adjusted returns, asset allocation to unlisted renewables may provide an even higher diversification benefit.
A key challenge for successful energy transitions is to generate a broad-based expansion in investment in clean energy projects, notably in renewable power, across emerging markets and developing economies (EMDEs). However, opportunities for institutional investors are limited by the number of investable clean energy companies in EMDEs’ public equity markets and the fragility of financial data on unlisted renewable assets.
Stepping up investment in unlisted renewable infrastructure will require supportive policy frameworks in order to increase the flow of bankable projects, as well as mechanisms to reduce and manage associated risks and improve transparency. This paper addresses this deficit by shedding light on the significant opportunities as well as the real-world considerations faced by institutional investors. Allocating capital to unlisted clean energy investments across regions is needed to achieve a global sustainable future.
This is an extract of the report’s executive summary. The full report can be downloaded here.