EUROPE – Capital requirements imposed by Solvency II on infrastructure will reduce renewable energy investment by pension funds, David Russell, co-head of responsible investment at the UK's Universities Superannuation Scheme told the IPE Awards Seminar in Copenhagen yesterday.

During a panel discussion on environmental, social and governance (ESG) issues, Russell called on the European Commission to address the issue of capital requirements. Otherwise, he predicted, Solvency II would "kill investments" in the renewable energies sector.

Another issue that dampened pension funds’ spirits for investments in this space are political uncertainties, he said.

"We had lots of solar panels in Spain, but then two years ago the government retroactively changed the tariffs, and this is something that has to be avoided," he said.

The change also affected a number of Danish pension funds, which at the time complained to the European Commission.

Pieter van Stijn, senior adviser for responsible investment at PGGM Investments, reported that a study into climate risk included in the fund’s strategic asset allocation over a 20-year investment horizon highlighted the problem of political change.

"The only risk that will play out is policy risk – not technology risk, not the world changing, but policy risk," he said. "We don't know what happens in the different countries, and that was an interesting outcome."

Participating in the panel following her keynote speech, EU Climate Action commissioner Connie Hedegaard sought to explain the reason decisions on Commission-level were often slow.

"One of the reasons why we are sometimes a bit slow in Europe to do the right thing is because we have this very participatory society, and too many are arguing to keep vested interests intact and not make any changes," she said.

Sony Kapoor, managing director of think tank Re-define, said that when it came to lobbying for regulatory changes on a European level, there was a "massive overrepresentation of sell side and short-term investors in Brussels", with long-term investors and capital owners underrepresented.

"The bad guys are always louder and larger in number," he quipped.

While Russell agreed that the voice of capital had been absent from what had been "critical questions" in the area of infrastructure investments – particularly in the ESG segment – he explained that it was largely a matter of resources.

"USS is a large fund with six people looking at ESG issues, which is unusual," he said. "But corporates have many more people and put a lot more money into lobbying."

Therefore, Russell called on pension funds to "work in collaboration" when it came to such efforts.

Peter Damgaard Jensen, chief executive at Danish pension fund PKA – well-established in the renewables sector – said he was hoping to be "part of all the wind farms in the North Sea" in future.

"We hope that we will see a future in Europe and Denmark where pension funds will play a new role in PPP –  hopefully green ones," he added.
Jensen predicted that, "in a few years' time", asset classes such as renewable energies, forestry and sustainable farming would be "as big as equities" in PKA's portfolio.

"We try to build up these asset classes because one of the good things about this is you can do it directly to make it as cheap as possible," he said. "Therefore you have to build up your own capacities in-house."

Addressing the fund industry, Russell pointed out there were "lots of renewable energy funds out there already".

"We do not need any more, as the existing funds do not get enough investments at the moment," he said. "What we need is better structured and larger funds and a re-thinking of the fee structure, which is burdening mainly smaller investors."