A number of investors put their money together, sharing the risk and returns of the pooled investment. Pooled funds are convenient for large institutional investors who would otherwise have to manage a lot of small investments themselves.
Funds directly invested in new companies that are usually high-risk and potentially high- return. A large percentage of new business projects (ventures) fail, but early investors in successful start-ups sometimes make lots of money.
Investors lend money to companies by buying their bonds. Green bonds finance low-carbon projects like energy efficiency retrofits or renewable energy infrastructure. Institutions could invest in green bonds via a switching strategy (purchasing green bonds gradually, and only when the pricing/risk profiles are right) rather than a mandate strategy, which could be restrictive. This would prompt our fund managers to look for good green bond options that they could then offer to other clients; many would be delighted to develop such options but clients rarely ask for it. This could be a big help in developing the burgeoning green bond market.
To avert climate change we need $1 trillion more per year to be spent on green infrastructure over the next 36 years.1 Investors will have to step up to the plate - and institutional investors have the money and long-term incentives to do that.
Long-term investors especially gain from investing in infrastructure, because they are uniquely able to wait through the construction and payback phases to start making a profit. Infrastructure investments also hedge (protect) against inflation, add to the diversification of a portfolio because they do not move with the market, and match the long-term priorities of pension funds and endowments2 - so they’re smart investments for long-term investors.
There are various reasons. For instance, investors are uncertain about government subsidies of green energy projects.3 Renewable energy can be high-risk and low-return, and institutional investors may not feel equipped to invest in developing businesses, preferring larger, more established firms instead.
1. International Energy Agency. 2012. “Energy Technology Perspectives 2012: Pathways to a Clean Energy System Executive Summary.”
2. Inderst, Georg. 2009. “Pension Fund Investment in Infrastructure.” OECD Working Papers on Insurance Pension Fund Investment in Infrastructure (32): 1–47.
3. Kaminker, Christopher, and Fiona Stewart. 2012. “The Role of Institutional Investors in Financing Clean Energy.” OECD Working Papers on Finance, Insurance and Private Pensions (23): 1–54.