As we attempt to navigate our way through the challenges wrought by the global pandemic, it is clear that no sector has been left untouched by its far-reaching impacts.

The shift seen in the clean energy space is notable, with renewables proving to be a resilient source of power through the pandemic – with demand for sustainable energy increasing during the crisis.

The International Energy Agency forecasts that demand for renewable-generated electricity rose 7 per cent in 2020, even while global energy demand fell by 5% [1]. And in Europe, renewables were responsible for generating more electricity than fossil fuels for the first time ever in 2020[2].

Covid-19 can be the catalyst for our greener future. This belief is clear when we look at the organised efforts from governments across the world on the energy front. The strategic direction for many governments has been firmly pointed towards renewable sources — particularly when adding generational capacity to their national grids.

The Council of the EU recently adopted the bloc’s Recovery and Resilience Facility, a €750 billion recovery package designed to support Europe’s economic recovery which has investment in renewable infrastructure at its heart. We should see more progress with renewable projects across the region, including wind, solar and hydrogen. In the UK, the Government has pledged to “Build Back Greener”, committing to producing more than enough electricity to power every home in the country via offshore wind by 2030.

In the United States, getting the green agenda back on track is a priority of the new Biden administration. One of the new President’s first actions in the Oval Office was to apply to rejoin the Paris Climate Agreement, which has just recently taken legal effect, bringing one of the world’s biggest carbon emitters back into the Agreement. Satisfying its demands will require a concerted effort from the USA to invest in its renewable energy capacity.

Institutional investors have a major role to play in bringing these green plans to life. They are sitting on a huge pile of capital — PwC estimates that total institutional AUM could reach $145.4 trillion by 2025[3] — which could have a pivotal role to play when it comes to investing in the renewables infrastructure the world needs to truly tackle climate change.

There are positive signs that institutions are up for the fight. We recently spoke to institutional investors worth $6.9 trillion AUM to examine how the coronavirus crisis and financial uncertainty of the past year has affected their appetite for renewables. We found that projected investment in renewables continues almost unabated, with institutions planning to double their allocations over the next five years. Over the next decade, respondents plan to invest $742.5 billion into the sector^[4].

The combination of low yields on traditional assets and increased demand for renewable power has made the sector particularly attractive for investment. Over half those we surveyed nodded to the stable and predictable cash flows associated with the asset class as a driver for investment, and a similar proportion cited the long-term yields that renewable real assets offer.

This is particularly important in light of recent government stimulus packages to mitigate the economic damage of the pandemic, and their aggressive monetary policies that will likely hold interest rates at record lows.

It is not just financial considerations that are driving increased allocations to renewables. There are signs that some investors are drawing confidence from governmental commitments on climate, with 42% saying that the EU’s recovery plan will boost investment for renewables and 41% identifying the UK’s net zero target as a driver of investment. But there is appetite for governments to go further: 68% of respondents said that the lack of international cooperation on this issue is the prime factor hindering the energy transition.

Ultimately, there will be a role for everyone to play in developing our green energy infrastructure. This calls for a collaborative and organised effort from governments, institutional investors, specialist energy fund managers, banks and energy companies.

Looking specifically at institutional investors, the role they can play in green recovery cannot be overstated. In order to maximise the impact of these investors, much of the onus is on specialist fund managers recognising that institutions will be at different stages of their investment journey when it comes to renewable assets. As understanding grows around renewable assets’ ability to provide stable, long-term returns, we will see greater uptick in investment. But alongside encouraging education, if we want to see real change, the industry must work together to provide investors with more flexible solutions that cater for different risk appetites. This gear change will be a key driver in taking green recovery to the next level.

By Matt Setchll, co-head of Octopus Renewables

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[1] IEA (2020) Renewables 2020. Available here: https://www.iea.org/reports/renewables-2020

[2] Ember (2021) EU Power Sector in 2020. Available here: https://ember-climate.org/project/eu-power-sector-2020/

[3] PwC (2020) Asset & Wealth Management Revolution: Embracing Exponential Change. Available here: https://www.pwc.com/ng/en/press-room/global-assets-under-management-set-to-rise.html

[4] Octopus Group report (2020) “Renewables and the recovery: Accelerating investment in a post-pandemic world”. Available here: https://octopusrenewables.com/wp-content/uploads/sites/9/2020/11/OG126-OR-Institutional-Report-final.pdf