Global institutional investors plan to almost double the proportion of their portfolios invested in renewable energy infrastructure from 4.2% to 8.3% in the next five years.
That’s the suggestion from Octopus, which surveyed institutional investors representing $6.9 trillion (£5.2tn) under management about their future plans – the results suggest this rise is expected to continue to 10.8% over a ten-year timeframe as global climate action continues to ramp up on the road to reaching net zero by 2050.
The study found 80% of institutions surveyed plan to step up the finance they dedicate to renewable energy infrastructure over the next three to five years, with 53% citing “stable and predictable cash flow” as a reason to invest in clean power.
Just under half of those questioned said the “long-term yield outlook” of the sector was appealing to them and 78% said demand for renewables is being driven in many cases by pressure from younger generations who are keen to go green.
Half of investors surveyed said they believe renewables have become more attractive prospects for investments during the COVID-19 pandemic and resulting economic downturn for these reasons.
Investors in Europe, the Middle East and Africa (EMEA) are forecast to increase allocations in renewables by the greatest amounts, with clean power investments expected to make up 10.1% of portfolios in five years, rising from 4.6% today.
While investors from across the UK expect average increases from 4.6% to 9.3% over this timeframe, the US is forecast to lag behind other regions with a significantly smaller rise from 3.5% today to 6.1% in the next five years.
Aside from these positive statistics for the renewable sector, the pandemic has also had some negative effects for green investment – the rate of fossil fuel divestment from fossil fuels has slowed due to the pandemic and the uncertainty that has resulted – the average divestment rate of 4.5% recorded through 2020 is noticeably less than the 5.7% Octopus forecast for 2020 last year.
Investors have also slashed planned divestment rates to 5.2% over the next five years and 8.6% over ten years, down from the figures of 14.4% and 15.6% outlined in last year’s edition of the survey.
Alex Brierley, Co-head of Octopus Renewables, said: “Renewable energy has proved an incredibly attractive asset class in the face of this year’s volatility, buoyed both by growing external pressures to invest responsibly, and by investors looking for long-term sources of yield. There is further progress to be made however, and alongside renewables investment, divestment from fossil fuels also remains key. As gatekeepers to trillions of dollars, institutional investors have a critical role in fighting climate change. But to move the dial, investors have been clear that issues such as lack of government coordination, liquidity issues, and energy price uncertainty are standing in their way.
“Alongside governments, specialist energy fund managers, like ourselves, need to ensure we make investments more accessible and encourage greater investment in renewables and divestment of fossil fuels. We also recognise that there will be multiple routes to market and that investors will be at different stages of the journey. But understanding of the asset class’ ability to provide stable, long-term returns, while helping save the planet is growing. It is critical we use this momentum to drive further positive change.”