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Analysis by Imperial’s Centre for Climate Finance & Investment shows how renewable energy has benefitted from technological improvements, policy support and lower financing costs

In November, world leaders convened in Glasgow for the 26th Conference of the Parties and announced their commitment to helping the world reach net zero by 2050. To achieve such an ambitious goal, the International Energy Agency (IEA) estimates annual spending on clean energy needs to triple to $4 trillion by 2030.

Despite the historic amounts of capital flowing towards renewable and clean energy technologies (which are a key pillar of the transition), annual additions of wind and solar PV need to reach 390 GW and 630 GW respectively – four times the current levels. A significant portion of future investment needs to occur in emerging and developing economies, which have historically been deprived of funding because of underdeveloped capital markets, higher financing costs and perceived levels of investment risk. So, what needs to be done to improve investor confidence and increase investment flows?

Over the last 18 months, Imperial’s Centre for Climate Finance & Investment, along with our colleagues at the IEA, have attempted to answer this question by publishing two (the first in a series of four) reports that outline the investment case for renewable energy. In the most recent report, we looked at stock markets across developed and developing economies and created global and regional clean energy and fossil fuel equity portfolios.

Analysing portfolio performance

After analysing portfolio performance over the last decade, our results showed renewable energy portfolios outperformed fossil fuel portfolios. This was driven by technological improvements (e.g. more efficient solar panels and larger wind turbines), favourable policy support and lower financing costs.

We also tested how portfolios performed during periods of increased market volatility and found renewables proved to be more resilient than fossil fuels by exhibiting lower correlations (i.e. being less reactive) to broader market portfolios.

Additionally, many renewable energy projects derive their revenues from long-term contracts, known as power purchase agreements, which guarantee the prices they receive for selling electricity. These create an element of cash flow certainty, which adds to their resiliency and portfolio diversification benefits.

Unlisted markets

Despite strong returns, as of 31 December 2020, listed renewables lacked sufficient market capitalisation and liquidity to attract significant amounts of institutional investment. Additionally, much renewable energy investment today is conducted by companies that were either not included in the study (due to our selection criteria) or not listed on public markets. Institutional investors such as pension funds, private equity funds, sovereign wealth funds and insurance companies are some of the largest private markets investors to have dramatically increased allocations towards renewable energy, particularly in the unlisted space. By looking at unlisted markets, investors can find a wider range of opportunities that suit their preferences by tailoring them according to technology, geography, size, etc.

However, the unlisted space is difficult to study. Although frequency of reporting is higher in public markets, making data more easily available, transactions in private markets are not consistently measured due to confidentiality. This makes it difficult to obtain the financial information needed to evaluate investments. While there are some entities that provide bottom-up analysis on unlisted assets, they may not be sufficient for investors that require comparable financial performance metrics on a mark-to-market basis (a way to measure the value of an asset based on current market price and conditions) and an unbiased, representative sample of assets.

Annual additions of wind and solar PV need to reach four times the current levels

For this reason, we are working on a third report that will examine portfolios of unlisted renewable energy and broader infrastructure assets, along with drivers of recent performance. We will unpack some of the key investment characteristics of the unlisted infrastructure asset class and explore methodologies investors can use to value and benchmark portfolios. We will also draw attention to the crucial role developing markets will play in the energy transition. As noted earlier, these economies have not received adequate capital because of insufficient data, illiquidity, currency and sovereign risks. By incorporating case studies of recent transactions, we will illustrate some of the ways in which different financial instruments and structures can mitigate investment risks and attract the necessary capital.

As investments in sustainable infrastructure continue to accelerate, we hope our work will contribute to reducing the immense infrastructure funding gap and allow investors to confidently integrate this asset class into their global portfolios.

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Kanav Duggal, headshot

About Kanav Duggal

Kanav holds an MSc in Climate Change, Management & Finance from Imperial College Business School. Prior to the Masters, he spent six years working in the consulting and renewable energy industries across multiple geographies. He is keen on leveraging his past experiences and education to help accelerate the clean energy transition.
Milica Fomicov

About Milica Fomicov

Research Associate
Milica was a director and portfolio manager in the Multi-Asset Strategies team at BlackRock. Before that, she was a portfolio manager on J.P. Morgan's CIO team, and multi-manager for US and Japan equity funds at Barclays, and AllianceBernstein in the US.

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