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Nordic Region: Energising alternatives

When the Nordic region’s largest investor – the NOK5trn (€602bn) Norwegian Government Pension Fund Global (GPFG) – commences its renewable energy investment programme, it will join other regional institutions already targeting the sector. 

Norway’s prime minister, Erna Solberg, announced to a climate conference in March that the government would consider establishing a separate mandate for renewable energy for the GPFG — a sovereign pension fund built on revenues from the country’s petroleum activities.

In April, the government announced that no separate mandate would be established, instead opting to nearly double renewable investments to NOK50bn.

Alternative investments, including renewables, have become an important area for Nordic pension funds in the past few years. Boosting allocations to alternatives has been seen as a way of spreading risk more broadly by using asset classes less correlated with equities, achieving longer-term stable returns, as well as potentially higher returns in some sub-sectors. 

“In Denmark, real asset investments such as infrastructure and real estate, as well as private equity structured investments, are examples of alternatives that have received renewed high interest during 2013,” says Casper Hammerich, senior investment analyst at consultancy Kirstein.

“Finnish investors have long had a high interest in hedge funds, whereas Swedish and Norwegian investors have historically shown a relatively high interest in private equity, structured investments and real estate,” he adds. 

Maria Rissanen, analyst at the Finnish Pension Alliance TELA, says one example of the growing appetite among Finnish pension investors for alternatives is the increase in hedge fund investment. At the end of 2013, institutions had €9.2bn in hedge funds, or 5.7% of total investments of the Finnish statutory earnings-related pension scheme. This was 1.2% higher than 2012, with three-quarters of this growth coming from new purchases, rather than asset growth.

“It’s challenging to achieve returns especially on fixed-income in the current investment environment,” Rissanen says. “There is also a need to improve the diversification of the portfolios and to reduce the portfolios’ dependence on the development of listed equities.”

In Denmark, Hammerich notes, some investors have backed renewable energy to provide guaranteed income streams from long-lasting fixed-fee contracts with domestic energy companies, as well as achieve diversification from traditional assets. 

“On the flip side, some investors question the case for renewable energy because of the scarce liquidity, limited internal resources and knowledge of such investments,” he says. “Why invest in complex infrastructure when you can invest with more liquidity in real estate, giving you similar returns?”

At a glance

• The Norwegian Government Pension Fund Global nearly doubles exposure to renewable energy.
• Alternatives are seen as increasingly important for Nordic pension funds. Preferences as to the precise type differ from country to country.
• Renewable energy is attracting significant investor interest but regulatory risk is a concern following Spain’s 2008 move to reduce feed-in tariffs.
• Investment opportunities in renewables have been hard to source in the Nordic region, with a gap between innovation and commercial application.

PensionDanmark has so far invested around DKK11bn (€1.47bn) in renewable energy, 7% of its total assets. The fund’s chief executive, Torben Möger Pedersen, says the fund has pinpointed several asset classes that give attractive returns without the risk and volatility associated with listed equities, and renewable energy is one of these. “On a medium to long-term basis, such assets can provide PensionDanmark with returns close to what can be expected from equity markets, just with more stability,” he says.

ATP has around DKK4bn invested in renewable energy, according to the fund’s head of infrastructure, Ulrik Dan Weuder – although the figure depends on what is considered renewable energy. The fund is a long-term investor in Vestas and Rockwool and has substantial investments in on-shore wind, hydro power and solar farms, according to Dan Weuder. “Alternative energy and climate-related investments are expected to be a major investment opportunity.” 

One of the reasons Danish investors are interested in renewable energy, says Jacob Legéne, investment analyst at Aon Hewitt in Copenhagen, is that the Danish government has a sharp focus on the energy sector, wind energy in particular. “This provides investment opportunities for the pension sector, if they are willing to enter PPPs (public private partnerships),” he says.

While investment in the sector has the advantage of public subsidies on the price of electricity, the drawback is regulatory risk, Legéne notes. “Investment in PPPs can be undermined if the legislators change the legislation regarding wind energy,” he says, warning that this is a skewed risk that is hard to estimate.

Elo, the Finnish workplace pensions provider set up by Pension Fennia and LocalTapiola, says it includes renewable energy indirectly in its investment by considering how the companies it invests in behave.

Hanna Hiidenpalo, chief investment officer, says: “I consider climate change to be one of the biggest themes and one of the most important underlying trends in environmental issues we look at in our company and sector analysis.

“We also consider companies’ efforts to curb global warming important in the context of evaluating potential returns.” Based on this approach, a high proportion of companies in Elo’s equity portfolio have products or processes that consume less energy, use renewable sources of energy or recycle waste efficiently, she says.

AP7, the Swedish government default fund for the premium pension system, has had an alternative investments programme since 2002.  This began as an equal mix of hedge funds and private equity. The hedge fund investments were redeemed in 2007-08 and, since then, the allocation comprises only private equity. Some 15% of this is invested in cleantech as a niche strategy, says head of alternative investments, Per Olofsson.

Cleantech is a term that covers recycling, renewable energy, green transportation, electric motors and other areas. “We believe there should be good investment opportunities in this sector because of the fundamentals behind it,” Olofsson says. “But political incentives are something you shouldn’t be too dependent on, because they tend to change all the time,” he cautions.

Investors in renewable energy were taught a lesson in 2008, when the Spanish government in the wake of the financial crisis cut back subsidies offered to promote clean energy. Since then, Spain has retroactively reduced feed-in tariffs from solar energy installations, dramatically changing the returns investors could expect from investments they had made in solar energy based on the original stipulations.

Søren Andersen, managing director of consultancy Willis, says that before the Spanish move, investment in solar energy had been considered almost as a bond-like investment, bearing virtually no risk. “I don’t think anyone saw that coming,” he says. “Maybe we have to rethink how we look at renewable energy.”

This change of attitude could be positive, Andersen adds, questioning how healthy it is to invest in an asset on the basis of a government guarantee. Olofsson says Spain has shown that investment in this area needs to be diversified. “You have to invest in businesses that can take off on their own, that can compete using their own strength against other alternatives.”

AP7’s cleantech investments are spread globally. It invests via HarbourVest in a North American and global cleantech fund of funds and has a separate mandate with LGT Capital Partners. Around a quarter of AP7’s cleantech programme is through co-investments.

But the fund has found it more difficult than anticipated to find investment opportunities, particularly in the Nordic region. “There is a gap between good new inventions and companies being set up,” Olofsson says, and the fund has instructed managers to prioritise the quality of underlying investment opportunity over the need to fulfil investment targets. 

“We would rather hold back at a slightly lower investment pace and focus on finding the best investment managers and opportunities, and that goes for the co-investments too,” he adds.

But Andersen says the main factor determining whether Danish pension funds will invest in wind power and other renewables is how successful will they be in transferring their liabilities.

Most are currently engaged in shedding the yield guarantees attached to traditional with-profits pension products, largely by persuading customers to switch to non-guaranteed pensions.

The more successful the pension funds are in transferring these liabilities, the greater their appetite will be for risky assets – equities, rather than alternatives such as renewable energy infrastructure, he says.

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