In 2015, clean energy investment set a new record with $329 billion flowing to the sector, even as fossil fuel prices plummeted.
But only a fraction of those dollars came from institutional investors, according to a new white paper from World Economic Forum. Of the top 500 asset owners in the world, including foundations, pensions and endowments, only 0.4 percent of their $38 trillion worth of total assets under management are low-carbon investments.
The clean energy sector will have to court those dollars if it is to garner the estimated $1 trillion in annual investment needed to meet the Paris climate agreement goals by 2030.
Now is the time for institutional investors to jump into the cleantech arena, according to WEF. Solar and wind have already reached grid parity without subsidies in about 30 countries, and about two-thirds of the world will see grid parity for wind and solar in the next few years.
“No longer classified as frontier technology, renewable energy has gotten much closer to utility-like infrastructure investments -- and indeed outpaced fossil-fuel energy investment globally in 2015,” WEF states.
The white paper notes that green bonds have proliferated and offer an opportunity to smaller investors that do not have the ability to jump into direct asset finance. For those with more appetite for risk but which don't have dedicated deal teams, “infrastructure private equity funds offer diversified exposure to renewable infrastructure assets.”
WEF acknowledges that there are many risks associated with investing in renewable energy assets, from project siting and design to political and regulatory risks. Overall, however, it is a lack of information and a lack of internal renewables deal teams that have led to under-investment by institutional investors.
The issues of information and standardization are finally being tackled. WEF points to IRENA’s solar energy standardization effort launched in June and also aggregations such as UNDP’s climate aggregation platform.
The relative youth of the sector means that some of the issues around standardization and handling larger pools of information will mature in the coming years. But one of the largest challenges, regulation, will be harder to overcome as it varies greatly across the globe.
WEF acknowledges the scale of the regulatory challenge, but also points to one solution that could proliferate under the Paris Agreement: carbon pricing.
“While there is no easy solution to the regulatory challenge,” the report concludes, “the establishment of a widespread market for carbon would be a large step to coordinate efforts and provide investors with a globally accepted price for the output of their projects.”
Even without a rapid expansion of carbon markets, the increased focus on bringing institutional and philanthropic dollars into cleantech investment has the potential to start bearing fruit in the new year.