EUROPE – Low government bond yields have opened a window of opportunity for pension funds to finance climate-friendly investment projects, according to the head of PensionDanmark.
But protection against political risk is still an unresolved issue for potential investors, he warned.
Speaking from the UN climate change conference in Doha, PensionDanmark chief executive Torben Möger Pedersen said: "There is a window of opportunity because all pension funds are faced with a need to invest in alternative assets because the yields on government bonds are so low."
Pension funds invested in sovereign debt are facing a reduction in the purchasing power of the pensions they provide, he told IPE.
"So we have a fiduciary responsibility to seek other types of investments," he said.
This need to identify alternative assets was a good match with the need to increase the allocation to climate-related assets, such as renewable energy assets, wind farms, solar-related power and transmission systems, he said.
At the conference, the UN is promoting 'innovate financing for climate-friendly investment', in an attempt to get investors around the world to back low-carbon and green-growth projects in individual countries.
The United Nations Framework Convention on Climate Change (UNFCCC) – the UN secretariat charged with supporting the operation of the convention – is presenting specific financing examples to the conference.
"The task is to match the pension funds' needs for assets yielding effective returns to the need for investment in energy," Möger Pedersen said.
He said government-backed green bonds could create low-risk instruments for investors.
"If international financial institutions can issue green bonds, and if these institutions are backed up by the governments, they will be able to attract a good rating."
PensionDanmark had shown it was possible for pension funds to invest in energy-related assets both on an equity basis and a debt basis, he said.
"One of the unsolved issues to be discussed today is how governments and international organisations can help with the political risk associated with investing in developing countries," Möger Pedersen said.
For political risk reasons, PensionDanmark has so far confined its infrastructure investment to Northern Europe and North America.
But if the financing proposals could provide some comfort regarding political risks in other regions, the pension fund is prepared to invest elsewhere, Möger Pedersen said.
He added: "It is important for us to be reassured that the regulatory regime will be stable and transparent if we are investing with some sort of government guarantee or feed-in tariff."
Such reassurance could take the form of guarantees or insurance instruments, he said, citing the MIGA political risk insurance provided via the World Bank for projects in developing countries.
Labour-market fund PensionDanmark manages €18bn of assets, and projects this will rise to €26bn in 2017.
It says it aims to invest 10% of assets in direct equity investments in renewal energy assets and a further 10% in loans to infrastructure projects.
A recent report by financial services firm Paradigm Change Capital Partners said that, in the EU alone, there was an investment gap if the union's climate targets for 2020 were to be met.
A further €567bn is needed for renewable energy, €104bn for power lines and €84bn for grid links to offshore projects, according to the report.
It concluded that €24bn a year was needed for energy efficiency costs before 2020.