Institutional Investors Look Toward The Sun And Away From Fossil Fuels


Anyone who participated in – or read about – the apartheid protests in the 1980s, anti-tobacco actions in the 1990s or the Divest for Darfur efforts in the 2000s may have sensed some deja vu earlier this year. Advocates ranging from municipalities to a state legislator to nonprofits announced that pension funds were dropping fossil fuel companies from their investment portfolios. The way to stop global warming, the argument goes, is to stop funding large, old energy corporations.

So, will any of those funds be reallocated to solar or other renewable energy companies? Probably not, say the advocates. Institutional investors are not selling shares of, for example, an oil company to buy shares in a solar panel manufacturer or a utility-scale project.

No matter, say renewable energy experts. Institutional investors are looking at solar as a viable investment, without getting into any divestment debates.
In September, Massachusetts Sen. Benjamin B. Downing introduced Bill S.1225, An Act Relative to Public Investment in Fossil Fuels. The bill calls for the state employees' pension fund to identify fossil fuel companies in its investment portfolio and sell, redeem, divest or withdraw all those funds, in stages, over the next five years.

‘No other state has done this before,’ Downing says. ‘We like to think we are national leaders when it comes to clean energy and efficiency.’

The bill, which is currently before the Public Service Committee, does not offer any recommendations about what types of companies the pension funds should invest in instead.

‘I am agnostic on that,’ Downing says. ‘That's not to say I think we shouldn't increase the state's investment in renewables. We invest as a state more per capita in efficiency and are certainly close to being in the same position in renewables. I think the real key is to get out of the fossil fuel business.’
George Bachrach, president of the Environmental League of Massachusetts (ELM), which supports the bill, says divesting and investing are two separate issues. ‘Only a small portion of the portfolio is fossil fuels, and then to say with the next investment you can't look at a broad array, that may be limiting,’ he says. ‘That said, I think it's a fair conversation to have.’

Bachrach adds that ELM would likely support the pension fund investing in renewable energy, but the topic has not come up yet.

According to the environmental advocacy group, there are more than 100 petitions nationwide, asking municipalities to divest from fossil fuel companies. The announcements sometimes include a vague reference to investing in renewable energy instead.

However, pension funds have not been big investors in renewable energy, says David Nelson, senior director of Climate Policy Initiative (CPI), based in San Francisco. He says many large insurance companies have created project finance groups that invest directly into energy projects, which include both renewable and fossil fuel projects.

‘Insurance companies are very strongly involved in that portion of investments,’ Nelson says. ‘The pension funds – not at all.’

In fact, in its March study, ‘The Challenge of Institutional Investment in Renewable Energy,’ CPI noted significant limits to a large increase in institutional investment in renewable energy projects. One obstacle is that institutional investors must maintain certain levels of liquidity, transparency, diversification and risk, and ‘many pension funds will not invest directly in any illiquid assets, while many others have not built the specialist investment expertise to invest directly in renewable energy.’

Nelson adds that divesting from fossil fuel holdings and then investing in renewable energy companies is not simple.
‘When institutional investors divest companies that own fossil fuel, some of these companies may be utilities, and some of these utilities will have portfolios of generation that include renewables,’ he says. ‘There are very few companies that have only renewable energy, and the total market capitalization of those pure plays is relatively small.’

Few opportunities mean expensive investments, so it usually does not make economic sense for the institutions to invest in renewables on the corporate side. On the project side, some insurance companies have announced investments. This month, Fiera Axium Infrastructure and MetLife announced a joint investment to acquire eight Recurrent Energy solar power projects currently under construction in Ontario.

Other institutional investors include Prudential Capital Group's Energy Finance Group, which financed LS Power's Arlington Valley Solar Energy II in Arizona. That project, completed this year, has a 25-year power purchase agreement with San Diego Gas & Electric.

There are other investments, and there will probably be more in the future. Ten years ago, Boston-based Ceres, a group that brings together investors and environmental groups, created the Investor Network on Climate Risk (INCR), a network of 100 institutional investors that work for climate change through investor action. According to the INCR's 2012 Investor Action Plan on Climate Risks & Opportunities, investors should balance and diversify their holdings, and pursue low-carbon strategies and products with competitive risk-adjusted returns.

The report notes, ‘Even with rising global investment in clean energy and increasing numbers of low-carbon investment options, current levels of investment in climate-friendly technologies such as renewable energy are not commensurate with the scale of the long-term potential investment opportunity presented by global energy transformation.’

Or, as the CPI report puts it, ‘Investment practices of all but a few of the institutional investors are only beginning to catch up with the opportunities available.’

Nora Caley is a freelance writer based in Denver.

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