On the Record: Do you invest in clean energy infrastructure?
Tredje AP-fonden (AP3)
Mårten Lindeborg, deputy CEO and CIO
• Location: Stockholm
• Assets: SEK304bn (€32.7bn)
• Third Swedish buffer fund
We are excited at the prospect that the renewable energy dream could come true. We can see positive developments in the area – for instance, the falling cost of solar panel technology. But for us it is always a key issue to consider what the expected returns and risks are.
We have had relatively few large-scale approaches about potential investment opportunities in clean energy projects. Different markets have different rules, and we have to be aware of the risks. For instance, we considered investing in wind farms in Sweden, but that would mean becoming exposed to the market price of electricity. Other markets, such as the UK, may prove to be more stable because of clearer regulation, more experience and long-term projects, making it somewhat easier to calculate expected returns or drawdowns. But the fact that regulators can change the rules along the way is a major risk. We also want to be very confident about the level of direct yield, refinancing risk, leverage risk, and to make sure the other investors involved in the project have a similarly long-term approach.
From a sustainability point of view, we want to address the whole portfolio, in a holistic way.
AP3 monitors the carbon footprint of the portfolio and it is a challenge, given that the fund allocates close to 45% to equities. Nevertheless, AP3 is currently able to monitor the carbon footprint of its equity, real estate and timberland holdings and the results are satisfactory. AP3’s carbon footprint was more or less neutral at the end of June. There are some assets such as credit that are not included in the overall number, but it should not impact the end result, due to the low allocation to this asset class.
There are several ways to invest in green assets, and opportunities are coming to the fore. Last summer, AP3 launched an internal portfolio of companies that are efficient users of energy, water and materials compared with their peers. As companies with better control of costs, they may also prove to have better control on their overall business.
Investors do not necessarily need to enter into private equity arrangements to benefit from the growth of the renewable energy sector. For instance, we have become the second-largest shareholder, with 7% of the shares, in Renewable Infrastructure Group Limited. We also invest in green assets through Generation Asset Management, which uses different asset classes including credit.
• Location: Oslo
• Total group assets: NOK526bn (€60bn)
• Number of local authority clients: 418
• Life and pension group
We have increased our clean energy investments significantly in the last few years, both in Norway and abroad. As of June this year, the value of our renewable energy investments in Norway was just over NOK20bn (€2.28bn). In addition, having divested from a number of companies that derive a substantial part of their revenues from coal last year, we earmarked a further NOK500m (€57m) for renewable energy investment in developing countries.
The first investment in a solar park was made in South Africa in 2013 and it is now in operation. This year we concluded our first renewable energy investment in Rwanda. The project, which cost €20m, consists of a grid-connected solar energy farm near Kigali, the capital. To invest in these projects, we partnered with Norfund, the Norwegian government’s fund for developing countries, which focuses heavily on clean energy projects. In 2013 we created a jointly owned vehicle with Norfund called KLP Norfund Investments (KNI). The value of KLP’s renewable energy investments located in developing countries was NOK187m (€21.3m) as of June this year. The investments range from wind projects in Kenya to solar parks in South Africa and Honduras. We are looking at further investments.
For both the investments in Norway and abroad, we acquired direct equity stakes. When we invest in Norwegian assets we are happy to do it on our own as it is a market we know very well; when we invest in developing countries we prefer to have a partner who has good knowledge and experience of the sector, such as Norfund.
For investments in developing countries Norfund does the due diligence, but KLP participates in the investment committee. We have internal staff who are responsibile for carrying out the due diligence work on the projects in Norway. So far, the number of such investments has been limited, so the work has been manageable.
The strategic purpose of these investments is straightforward, as they provide long-term and safe cashflows. Regarding our developing country investments, they are also part of our ‘impact investment’ mandate, which consists of combining financial returns with having an impact on economic development and society. We do not have a set target for how much we want to allocate to renewable energy projects, but this is a sector we will continue to look at in the future.
Strathclyde Pension Fund
George Finnie, investment manager
• Location: Glasgow
• Assets: £15.7bn (€21bn)
• Local government pension fund
As part of our commitment to responsible investment, which stems from our signing of the UN Principles for Responsible Investment (PRI) back in 2008, we have set out a strategy to invest in renewable energy. We earmarked £750m (€1bn) in a New Opportunities Portfolio, which consists of several investments in private equity, debt and infrastructure. The first discrete investments in renewable energy assets were all made within the last two years and around £125m of the New Opportunity Portfolio is now invested in green energy and other environmental infrastructure.
In June we finalised a significant investment in UK offshore wind power, our largest such investment to date. We invested £50m in a fund launched by the Green Investment Bank (GIB) dedicated to the financing of a number of offshore wind farms in the UK. The fund has now reached £818m after the third close, nearing its target of £1bn.
We are also investing £20m in a solar power fund, which is part of our £100m commitment to the UK’s Pensions Infrastructure Platform.
We expect to make further investments in renewable energy. To date, the investments have been in new or established funds and handled by the in-house team. Assuming that we get appropriate resources from our sponsor, we may begin to invest directly in these assets.
We do see renewable energy as a separate asset class from other energy-generating assets, such as oil and gas.
Clearly, there is a relatively high degree of uncertainty when investing in renewable energy. At the moment, we can see there are some fairly clear changes coming – for instance, the subsidy regime is going to change for some of the technologies involved.
But notwithstanding the attractive risk/return characteristics of these investments, we believe they will be a sustainable and secure source of energy for our communities when they become operational and further into the future, with a positive impact on the lives of our members who are saving for retirement.
Interviews conducted by Carlo Svaluto Moreolo