IEEFA Report: U.K. Pension Funds Can Benefit Now From Renewables Infrastructure Play

Nov.15, 2017 — A new report by HSBC Global Asset Management and the Institute for Energy Economics and Financial Analysis (IEEFA) finds that U.K. pension funds can benefit now from investing in domestic and overseas renewable energy infrastructure.

Commissioned by the City of London Corporation’s Green Finance Initiative, the report, “The Renewable Energy Infrastructure Investment Opportunity for U.K. Pension Funds,” describes how an imminent pooling of U.K. Local Government Pension Schemes (LGPS) represents an £8 billion opportunity in renewables infrastructure assets.

It describes rapid growth and proven returns in unlisted renewables infrastructure, both in the U.K. and globally, a trend driven by market shifts that have place electricity generated by large-scale renewable sources on par with, or cheaper than, new fossil fuel power in many markets.

The report also details the particular characteristics of unlisted infrastructure that favor pension funds: Long-dated, inflation-linked, government-backed income streams associated with renewable energy assets match pension fund long-term liabilities to pension members. These traits are especially favourable in an era of low interest rates.

The report finds that investment opportunities in clean energy infrastructure are abundant in the U.K., where operational solar PV and wind assets have an investment market value in excess of £40 billion and where a further £25 billion in projects have planning consent.

U.K.-based pension fund allocations remain collectively small. Data suggests that U.K.-based defined benefit (DB) pension schemes in aggregate allocate less than 2% of their £1.8 trillion assets under management (AuM) to unlisted infrastructure, compared with allocations of up to 10% at large pension schemes globally.

Allocations collectively by 89 local government pension schemes (LGPS) are even smaller, totaling about 0.6% of total assets of £216 billion. However, a U.K. government initiative to aggregate these 89 funds into eight larger “pools” will give them the economies of scale needed to increase their allocations to infrastructure. The HSBC/IEEFA report calculates that the LGPS have collectively increased their target allocation to infrastructure to 7.5% from 3.7% of their AuM, equivalent to an additional £8 billion.

The Green Finance Initiative, a group established by the City of London Corporation and the U.K. government, brings together international expertise from the financial services sector to improve financing options for sustainable infrastructure projects.

Gerard Wynn, energy finance consultant at the Institute for Energy Economics and Financial Analysis (IEEFA), said: “The global and U.K. growth story in renewable energy represents an opportunity for institutional investors, and in particular for the U.K.’s maturing pension funds, which will benefit from particular attributes of unlisted renewables infrastructure. Increasing pension fund allocations can deliver stable long-term returns. For the UK, this may result in a swifter, and more affordable transition to a low-carbon economy, which already employs 430,000 people, contributes around 2-3% of GDP, and is poised for rapid growth.”

Commenting on the report, the Green Finance Initiative’s Chairman Sir Roger Gifford, said: “Climate control and reducing carbon emissions are a priority for countries across the world. The U.K. is an established leader when it comes to financing green infrastructure projects – and there are still investment opportunities that need to be explored. This report reveals there is potential to tap into even greater pools of finance, which would see carbon emissions lowered, provide jobs across the U.K., and ensure that pension holders see a good return on investments. It truly can be a win-win.”

Melissa McDonald, Global Head of Product – Equity and Responsible Investment, HSBC Global Asset Management, said: “The transition to a lower carbon economy requires significant capital. Renewable energy infrastructure can provide an excellent opportunity for institutional investors to meet the needs of their beneficiaries, manage portfolio level exposure to climate risk and provide the necessary capital for the new generation of energy infrastructure.”

NOTES

Reasons for low allocations to infrastructure by U.K. pension funds to date include poor awareness of the growth of renewables markets, and the additional skills required to source deals, especially when investing directly. Bigger pension funds are more likely to have these resources. The imminent pooling of U.K. Local Government Pension Schemes (LGPS) therefore represents an opportunity for pension funds to access renewables infrastructure assets. The LGPS pooling initiative goes live in April 2018. One of the principal goals is to seize on the resulting economies of scale to drive down management fees, and to invest more in infrastructure.

Among recommendations, the report states that pension funds should implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) to disclose their climate-related risks and opportunities on a comply or explain basis.

FULL REPORT available here : The Renewable Energy Infrastructure Investment Opportunity for UK Pension Funds

Press contacts:

Millie Allen (City of London); [email protected]; 020 7332 1388; 07710 860 886

Merete Svendsen Donlon (HSBC Global Asset Management); [email protected]; 020 7860 3140; Mobile: 0738 724 6131

U.S. Contact: Karl Cates (IEEFA); [email protected]; +1 917 439 8225