An Earth Day message to capital markets

Time to refocus on renewable energy investments
By Martin Haupts
Thu 21 Apr 2016 12:59 PM

Today is the 46th Earth Day and people from all walks of life, and all over the world will demonstrate their support for environmental protection.

It’s the biggest of the environmental celebrations and the Earth Day Network anticipates a billion people from 192 countries will take action today to safeguard the planet.

But events taking place in Paris today among a select few, will do more to shape the way we power our future and decarbonise our planet, than anything else.

Today a Climate Signing Ceremony will take place in Paris – a little more than five months since the terms of the agreement were agonized over in November. The ceremony will welcome leaders back to the French capital from across the world to commit their signatures and set last year’s Paris Agreement into action – and whilst doing so, they must also do more to set the business and investment community to work.

The investment community’s response must be wholehearted – but not just because the planet needs it. The message all spheres of society must now rally behind is the unparalleled nature of the economic opportunity this global energy transition presents us with.

John Kerry, US Secretary of State said in a ‘Road to Paris Climate Series’ address to an audience of business people and social activists last year that the shift to clean energy was the single biggest commercial opportunity of all time. It was a smart way to refocus the climate change dialogue away from social ideology to a pragmatic discussion about finance, job creation and economics.

Where the economics are strongest is where the need is greatest – in the emerging world. Against all the odds, 2015 proved to be a record breaking year for renewable energy investment globally but it was new markets that ran the show.

Emerging countries committed billions to clean energy with record increases, including Mexico ($4.2bn, up 114%), Chile ($3.5bn, up 157%), South Africa ($4.5bn, up 329%) and Morocco ($2bn, up from almost zero in 2014). Globally US$330 billion was invested in clean sources of power but capital market funds were conspicuous by their absence and this cautious view of the energy transition – particularly in the developing world – needs reviewing.

By 2050, more than nine billion people will demand and expect access to secure, affordable power at minimal cost to our environment. And in region’s such as the Indian sub-continent, Sub-Saharan Africa and South America, renewable energy is both an answer to the climate challenge and a powerful tool for economic development that will liberate state capital from expensive fuel imports. For them, renewable energy is an economic imperative, and one that emerging market governments are throwing policy and regulatory support behind. That makes it attractive.

And yet still, despite the policy pledges from all over the world to reduce carbon emissions and to prioritise investment in low carbon technologies, the institutional investment audience’s commitment is circumspect, particularly in the emerging market clean energy asset class, which is where I believe the most attractive investment opportunities lie.

As a former investment banker, I recognize the delicate risk profile of post-2008 investors. But low global growth, weak returns on government bonds and inflationary pressures means investors need to rethink clean energy in developing markets as a real opportunity. The post Lehman Brothers world is one of fixed income returns on traditional bonds that offer between 0% and 1%.

Solar investments mirror the stable, long term return patterns investors traditionally expected from fixed income, better than wind, biomass or other renewable energy asset classes. Internal Rate of Returns (IRR) on OECD solar projects typically in the UK, Germany and the US have traditionally hovered around the 5%-7% mark.

But compare that to solar investments in emerging markets, which I believe have the ability to offer consistently high single digits and even double digit returns. As an asset class I believe future energy in this context is peerless.

The falling cost of technology, and solar’s emerging market proof of concept made possible by multilateral development lending can take a huge part of the credit for getting us to a point where capital investors can – and should – feel bullish about the opportunities presented by solar in the developing world. In an environment characterized by a low appetite for risk, nothing offers stable returns quite like it.

And that’s the message leaders in Paris must deliver and reinforce from today until we reach a point at which we are powering our cities sustainably, successfully lifting billions out of energy poverty and igniting economic growth in new industries. In doing so, we will bring capital market investment dollars to the table and secure a real shot at a bright new future for everyone.

Martin Haupts is CEO, Phanes Group, renewable energy developers, investors and asset managers.

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Last Updated: Thu 26 Jan 2017 01:27 PM GST

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