Energy – Cover story A bump in the road
What we have been experiencing over the last few months, particularly the knock-on impact of the invasion of Ukraine, is a bump in the road towards energy transition. In a sense, it illustrates some of the challenges in setting a
long-term plan. Faith Ward, Brunel Pension Partnership
Moreover, market volatility, rising interest rates, inflation and a fall in issuance have taken their toll on ESG bond funds. But the regulator points out that funds with an ESG impact objective and Article 9 funds performed much better throughout the period. One area of the market which has benefited from the transition are private market investments in renewable power genera- tion, particularly strategies that include an inflation hedge, explains Pruthvi Odedra, who manages London CIV’s private market assets. Some of the assets Odedra manages are held in the £399m LCIV Infrastructure fund, which is 40% exposed to renewable energy. “So the portfolio is benefiting from the unforeseen energy price increases,” he says.
“Our latest secondary investment in our renewables portfolio has benefitted hugely as it is a UK portfolio of energy generat- ing assets in wind and solar. Its valuation saw an uplift of low- teen digits in the first half of this year due to the strong operat- ing income of the assets from merchant power exposure but also renewable obligation certificates that are index linked to inflation,” Odredra adds. But there are, nevertheless, pitfalls for investors to consider. One key risk is the potential impact of rising interest rates. “With these high interest rates, your discount rate will also increase on these assets, so particularly in the longer-dated assets, we might see a fall in valuations,” he says.
In the short run, the current crisis offers challenges for the transition to renewable energy, as Faith Ward, chief responsi- ble investment officer at local government pension pool Brunel, acknowledges. In an interview with Asset TV, she revealed that this crisis has forced the pool to review its ESG stance. “We’ve always recognised the need to be pragmatic and agile,” she said. “What we have been experiencing over the last few months, particularly the knock-on impact of the invasion of Ukraine, is a bump in the road towards energy transition. In a sense, it illustrates some of the challenges in setting a long- term plan.” London CIV’s Odedra also predicts that the focus on energy security could benefit conventional sources of power genera- tion. “Unfortunately, there will be some need for the develop- ment of conventional power assets, as speed is of the essence. Within the UK, we are seeing a huge increase in renewable enabling infrastructure, particularly, battery storage projects as part of the energy crisis in this country is due to intermittency of renewables. We have had low wind speeds and we have not stored enough energy to circumvent that.”
Paying the price
Does all this mean that institutional investors are turning their backs on renewable power? Far from it. If anything, there appears to be an overwhelming sense that the key players in the energy extraction market have failed to adapt and have, therefore, no place in the low carbon economy of the future. “People who are buying into them now might have missed the chance,” Moreland says. “Investors holding them got lucky, but once the war goes away and the system has adjusted to the pan- demic’s recovery, who is going to be the buyer? “Is now the chance to sell oil and gas companies at a profit that you never imagined? The question is, what is going to be the next driver for the longer term. Ultimately, we have to have a low carbon transition and the downward pressure on these companies will come back again,” he says. For investors who continue to hold fossil fuel companies, this represents a difficult balancing act, Loriot-Boserup says. “Obvi- ously, companies operating in the oil and gas sector have ben- efited during the last [few] months, but to be completely trans- parent with you, when we build these low-carbon, Paris-aligned strategies, we don’t think about the short term, we think about the long-term. And if these companies don’t change their busi- ness model, they are not going to be part of the net-zero econ- omy. Climate change represents a systemic risk, and compa- nies with high carbon emissions will ultimately pay the price,” he says.
Issue 117 | October 2022 | portfolio institutional | 21
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