The UN’s Intergovernmental Panel on Climate Change (IPCC) report this month delivered a sobering assessment on the state of climate change. Described as a "code red for humanity" by UN chief António Guterres, the impending environmental catastophe is driving investors to intensify their search for investments that will tangibly help to reverse man-made global warming.

But as demand grows for investable assets in the renewable energy space, asset owners are finding it hard to source assets that fit their requirements. This applies not only to the number of available private markets deals, but also to the rising price of public market investments.

Simply put, the sector is in danger of becoming a victim of its own success.

Just as certain investment strategies - for example, the low volatility factor in a smart beta context - faced a wall of money at the height of their popularity, so concern about valuations in climate-related assets is forcing some investors to think twice.

John Pearce, Unisuper

Last week in Australia, UniSuper chief investment officer John Pearce remarked that prices for some green-tech assets, such as battery, solar panel and electric car makers, were being inflated by the popularity of ESG investing.

New Zealand Super has also voiced its concern at different times about the perils of investing in environmental technologies that have been priced too high owing to increased demand from big investors.

COST REDUCTIONS

The good news is that renewable energy has, in recent years, become a much more viable alternative to fossil fuels in terms of cost. In many places, power from renewables is now cheaper than power from fossil fuels.

Asset manager Lazard’s levelised costs of energy (LCOE) analysis shows that 10 years ago it was much cheaper to build a new fossil fuel power plant than to build a new solar or wind plant. Today, large scale solar is the least costly option to build and operate, while the cost of new wind farms has dropped by 70%.

According to Our World in Data researcher Max Roser, this is a strong argument for institutions to scale up their investments into renewable technologies.

“Increasing installed capacity has the extremely important positive consequence that it drives down the price and thereby makes renewable energy sources more attractive, earlier,” said Roser. 

In the coming years most of the additional demand for new electricity will come from the rapidly developing countries in Asia and Africa. The scaling up of renewable energy systems has a tangible impact for them in lowering the cost of energy.

“The learning rates for wind and solar PV are exceptionally fast. It is extremely rare to find technologies of this kind,” said Roser.

Some Asian institutions are at the forefront of investing to help the environment. The Monetary Authority of Singapore, for example, is allocating $1.8 billion of its Official Foreign Reserves to climate-related equity and fixed income mandates.

Recently, the government of New Zealand proposed a multi-billion dollar project that would see them using 100% renewable energy within the next decade.

HYDROGEN'S POTENTIAL

As reported, New Zealand Super is gearing up its sustainability strategy with a focus on renewable generation, decarbonisation and climate-transforming industries. It is already actively collaborating with climatetech specialists and is also looking closely at the potential of hydrogen as an alternative fuel.

A recent UBS report on hydrogen said the long-term impact for renewables will likely be positive on capital returns, but this is dependent on the blue/green hydrogen split and the pace at which green hydrogen can enjoy policy support.

Currently, much of the hydrogen fuel supply is blue hydrogen - derived from natural gas - which is cheaper to generate, but not as clean as green hydrogen. Energy specialists suggest that the same cost reductions seen with wind and solar could also be seen with green hydrogen.

In Asia, companies like Sinopec, Inpex and Santos are studying hydrogen and developing projects. Chinese energy firm Sinopec is seeking to build a fully integrated hydrogen business in China, including a green hydrogen project, China's first, and a plan for 1,000 hydrogen refilling stations by 2025.

With so much investment attention focused on climatetech and alternative energy, the challenge for Asia Pacific asset owners will continue to be finding suitable projects at the right price.

Join asset owners in their discussion on ESG at our Mandating Change Week which runs from October 25-28, 2021. Click here to register.