Pooled Renewable Energy, Venture Capital Funds, and Green Bonds

What is a pooled fund?

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.

What is venture capital?

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.

What are green bonds?

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.

Why do we need new investment in renewable energy & green technology?

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.

What are the advantages of direct investment in green tech & infrastructure?

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 endowments- so they’re smart investments for long-term investors.

Why aren't all institutions already investing in these sectors?

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.

 

References

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.