Renewable infrastructure has been an increasingly popular market for private capital, particularly over the last 5 years, as investors have been able to take advantage of the increasing number of government policies and subsidy schemes enhancing the attractiveness of the asset class. It is also a necessary market for private capital to invest to meet UN goals. C.$1.1bn-1.3bn [1] of investment is required in the sector each year in order to meet 2030 goals.
In addition to what we deem to be an attractive financial opportunity (fund dependent), investing in renewable infrastructure can return a positive ‘impact’ on the condition that one or both of the following statements are satisfied:
- The renewable energy generated prevents/replaces the use of fossil fuels, increasing the volume of carbon avoided emissions.
- New or improved infrastructure leads to greater access and increased use of renewable energy
Most funds in this universe address both. Funds invest directly in energy generating assets such as wind turbines or solar panels (statement 1) and allocate a portion of capital to improving access to renewable power, for example developing grid networks or cabling (statement 2).
A popular and clear framework that can be used to measure impact are the UN Sustainable Development Goals (SDGs). We have found that some fund managers in this market indeed report on their renewable portfolio against these goals. (Unexpectedly, many managers that invest in the space struggle with ESG reporting, but that is another blog).
SDG 7, ‘Ensure access to affordable, reliable, sustainable and modern energy for all’ and specifically Target 7.2, ‘By 2030, increase substantially the share of renewable energy in the global energy mix’ is the most obvious target that this investment strategy impacts, but when looking at the wider framework it is easy to see how investing in renewables impacts many more goals.
Target 3.9 of SDG 3 (Good Health and Wellbeing) includes substantially reducing the number of deaths caused by air pollution. Household and outdoor (ambient) air pollution is one of the largest contributing factors to mortality globally[2]. Renewable energy generation contributes to reduction in greenhouse gas emissions and air pollution. Target 11.6 also tracks air quality in cities.
In contrast to fossil fuels, energy generated through solar and wind uses little to no water. Replacing water intensive energy generation processes with renewable energy generation could significantly impact water withdrawal rates (Target 6.4, By 2030, substantially increase water-use efficiency across all sectors and ensure sustainable withdrawals and supply of freshwater to address water scarcity and substantially reduce the number of people suffering from water scarcity).
A simple way of looking at the impact renewable strategies have on SDG 8 (Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all) is, each new project creates new jobs, but are more jobs lost in other parts of the energy industry as a result of the shift towards renewable energy? The evidence suggests not. Energy transition from fossil fuels to renewables results in net employment gains with c.70% more jobs created for every $1 spent on renewable energy compared with $1 on fossil fuels.[3] Re-training workers from the oil and gas sector so they are able to develop skills needed in renewable power (‘just transition’) is also important to SDG 8.
SDG 13 (Take urgent action to combat climate change and its impacts) can only be achieved by replacing fossil fuels with wind and solar in energy generation. Any advances that funds provide in renewable technology and efficiency help to achieve this goal. All managers that reported against SDGs measured impact against SDG 13.
We have seen renewable funds that also report against:
SDG 9 – Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.
SDG 12 – Ensure sustainable consumption and production patterns
SDG 17 – Strengthen the means of implementation and revitalize the Global Partnership for Sustainable Development
Of the funds in our universe, we have seen impact measured against 9 of the 17 SDGs. When assessing managers, it is crucial to look at their reporting framework behind the SDGs. The three questions we believe investors should be asking are: Has the manager assigned a clear and appropriate metric to measure impact against each SDG they report against? Is there a sensible methodology in place to calculate this number? Does the manager have a clear rationale as to the link between the impact created by the renewable asset and the relevant SDG? It is also important to be conscious that the amount of positive impact an investment will have on a specific SDG depends on the type of investment made, investing in interconnector cables in areas of poor electricity access will be more relevant to SDG7 and less to SDG8 than investing in the construction of a wind farm in an area with high unemployment.
In addition to an attractive investment opportunity with a global and diverse opportunity set, the fact that renewable strategies, we believe, can be sensibly linked with multiple SDGs highlights the importance that renewable energy has in creating a sustainable world as well as the crucial role they play in our transition to a low carbon economy. Generating more renewable energy leads to improvement in sustainability across all of society, and as seen above improving access to, and availability of renewable energy magnifies the impact.
[1] https://sdgs.un.org/sites/default/files/publications/262818041SDG7_Policy_Brief.pdf page 42
[2] https://ourworldindata.org/air-pollution#:~:text=Air%20pollution%20contributes%20to%209,9%25%20of%20deaths%20in%202017.
[3] https://sdgs.un.org/sites/default/files/publications/262818041SDG7_Policy_Brief.pdf from Chen, Y. (2017), Renewable Energy Investment and Employment in China, PERI Working Paper Series Number 439, Political Economy Research Institute (PERI), University of Massachusetts, Amherst, MA.
