The outlook for investing in renewables, and cleantech in general, ought to be optimistic as the world is fighting to stop global warming and other climate issues. Pirkko Juntunen assesses the approaches of Nordic institutions

The governments of the Nordic countries in particular, have clearly stated their focus on reducing emissions and finding cleaner solutions to existing energy sources. In addition, earlier this spring the EU Commission published its roadmap for transition to a low carbon economy by 2050.

The Commission estimates that in order to reach the goal of reducing emissions by 80% over the next 40 years it will require annual investments averaging 1.5% of GDP - equivalent to €270bn. Financing is a challenge and many are looking to institutional investors as it is unsustainable for energy and utility companies to raise the funds on their own.

The OECD is also urging pension funds and other institutionals to invest in green growth. In a recent report, the OECD said these types of investors could potentially play an important role in financing green projects.

For pension funds, investments in renewable energy and energy infrastructure is arguably a good alternative to listed equities and bonds as they generate returns in line with the equity market but with lower risk and cyclical sensitivity than equity investments.

However, recently, the financing has been hampered by governments’ retroactively changing tariffs. This happened in Spain and the Czech Republic as a result of problems in public finances. Confidence in the sector was dented as government backed fixed prices - subsidies - are still needed in order for the sector to compete with fossil fuels.

Lack of commitments has also been a result of lack of experience in direct investments among pension funds, as well as uncertainty about the future pipeline of similar investment opportunities before agreeing to the initial investment.

Nathalie Han, a Swiss-based fund manager at Johannesburg-based Craton Capital, the global reseources specialist firm, believes although the long-term prospects for the alternative energy sector looks good, the market is in a transitional period with tariffs and prices falling. “In the current market environment, you have to be careful as it is still a niche. It is still mainly for people who like the whole idea of alternative energy and renewables,” she says.

That profile does fit Nordic investors, and Craton is now targeting the region with its Renewable, Alternative and Sustainable Resources fund. This invests globally in companies and issuers that have direct exposure to the alternative energy industry. The fund invests primarily in renewable energy and power, agriculture, timber and forestry, water, resource efficiency and environmental services.

In Denmark, there are many examples of pension funds investing in greentech. The likes of PensionDanmark, AP Pension and PBU created a consortium, Green Power Partners, to invest in solar power in Spain a few years ago. Other investors include ATP.

Most recently PFA Pension, TrygVesta, Danica and PensionsDanmark revealed plans to invest in a new fund investing in sustainable energy in sub-Saharan Africa. They are expected to invest DKK600m (€81m) into the DI Frontier Market Energy & Carbon Fund, which is a joint venture between The Confederation of Danish Industry, IFU, the Industrialisation Fund for Developing Countries, Global Energy Efficiency and Renewable Energy Fund administered by the European Investment Bank and Fabvest, a South African investment company.

Earlier, PensionDanmark, with assets of DKr100bn completed an innovative renewable energy deal in which a pension fund is a direct investor without funds acting as intermediaries. PensionDanmark signed a deal with Dong Energy in which the pension fund bought a 30% stake in the Nysted offshore wind farm for DKr400m. In addition, Dong bought E.ON’s 20% stake in the farm and is reselling it to PensionDanmark for DKr300m. Once the deal is done, Dong and PensionsDanmark will be 50/50 owners of the farm.

Craton’s Han said that in general fund raising would still be challenging for most. “Something that is good for society is not necessarily going to make you money so you have to be positioned carefully,” she added.

In Sweden, the sector has had less attention from institutional investors, although funds such as AP7, the default fund in the national defined contribution system, invests in cleantech and plans to increase its allocation from SEK1bn (€11m) to SEK3bn in the coming years.

Joel Grönberg, an investment consultant based in London for Söderberg & Partners, the Swedish consultancy, says the problem in Sweden is that government subsidies, or fixed price tariffs, are lower than elsewhere such as Spain and Germany. “Sweden is therefore less attractive and it makes more sense for institutional investors to perhaps invest in turbines for your own consumption,” he says, adding that institutional investors perhaps should take another look at the sector because of the return potential. “The de-risking environment that Swedish life and pension insurance companies are in, makes investing in these types of assets difficult. But perhaps the way forward is financing rather than owning.”

Despite the challenges, Folksam has invested SEK200m in windpower. The fifth such commitment for the company since the beginning of the year. Folksam is a partner in PWP, a wind power company, together with FAM, wholly owned by the Wallenberg foundation, and Proventus Capital Partners, a co-investment vehicle focusing on investments in private corporate loans and public corporate bonds.

Folksam and the other investors will each own a third of PWP. Folksam is buying its share in PWP AB from Proventus. According to Anders Sundström, Folksam’s president and chief executive, the reason behind the investments are secure long-term profitable growth.

Grönberg agrees that there are some investments that falling subsidies and electricity prices coupled with the lack of price security is deterring a greater interest. He also pointed to the fact that several cleantech companies turned out to be stock market flops, scaring off investors.

However, Grönberg pointed to one success story, Arise Windpower. Arise is a Swedish wind farm company which is majority owned by AP3, one of the national buffer funds, ATP, the largest institutional investor in Denmark, Alecta and Nordea Fonder, the bank’s fund arm and Norway’s Statkraft, Europe’s largest renewable energy company.

Arise recently secured financing to build a windfarm in Jädraås in Sweden together with Platina Partners, a UK-based independent European investment firm focusing on renewable energy infrastructure projects, with Vestas, the Danish wind power firm supplying the 66 wind turbines.

The financing is a loan for a total of DKK2bn, with PensionDanmark lending around DKK1bn of this, and banks DnB NOR and SEB providing the rest. The Arise deal is part of PensionDanmark agreement with the country’s export credit agency to provide financing to support the country’s exports. In the three-year agreement, PensionDanmark will lend to foreign companies placing orders with Danish firms with a particular focus on wind-farms.

In these challenging times, innovation is perhaps key. Innovation in terms of funding and financing with structures that work for both parties over the long-term, yet are flexible.
Danes seem to have found a way of creating partnerships between institutional investors and the industrial partners, where the pension fund provides the capital and the industrial partner looks after the operational side and construction, while at the same time keeps a substantial share of the asset as to ensure alignment of interests. Perhaps this is also the way forward elsewhere in the region.