Asset owners say they expect that the European Union’s recently announced “Green Deal” will provide them with a clearer framework to evaluate, measure and participate in sustainable investment opportunities, which are set to increase under the ambitious package.
European institutional investors have been ramping up sustainable development goals-driven investing and reducing their portfolio exposure to companies producing high levels of carbon dioxide emissions since 2015, when the Paris Agreement and its focus on climate change was adopted.
Investors predict that the investment strategy of the EU’s Green Deal, which was confirmed by the European Commission on Jan. 14, will make more investment choices available to them across Europe, including, for example, more renewable energy projects, green bonds, social impact investments and new companies facilitating a transition to a green economy.
“The Green Deal will open the world of impact investing to institutional investors,” Gregoire Haenni, chief investment officer of the $20 billion Caisse de Pre-voyance de l’Etat de Geneve, Geneva, said in a telephone interview. “It’s a game changer.”
The EU’s investment plan, set to launch in 2021, is aimed at channeling €1 trillion ($1.1 trillion) from public and private investors over a decade into curbing greenhouse gases, supporting industries and protecting workers in the transition toward a carbon-neutral economy by 2050.
Under the plan, the commission alongside the European Investment Bank will select and co-invest in projects and companies across Europe. That government backing is expected to boost the risk-return profiles of the projects as well as their viability, all of which should make them appealing to institutional investors.
More than half of the €1 trillion will come from the commission’s own budget, while the rest is expected to be contributed by investors.
Between 2021 and 2027, the commission, through its InvestEU Programme which harnesses public and private investment backed by an EU budget protection against certain levels of losses implemented by the European Investment Bank, will invest €650 billion in areas such as infrastructure, energy, green economy innovation, technology, and small and medium businesses.
The European Investment Bank will additionally boost investment choices available to investors by injecting between €33 billion and €35 billion per year into the financing of projects and companies, while seeking another €660 billion from investors over the next decade.
By 2025, half of the EIB’s projects will be aimed at sustainable and climate-change-related investments.
Institutional investors said the commission’s Green Deal will help them better align their portfolios with and measure their portfolios’ impact against the United Nations’ Sustainable Development Goals, which are aimed at fostering clean energy and water resources as well as reducing climate risk, poverty and social inequality.
Noting the limited ways in which investors can currently measure the impact of their green investments, pension fund executives welcomed the commission’s plan to increase sustainable investment choices that can more easily align their portfolios with the U.N. goals.
Magnus Billing, CEO of Alecta Pensionsforsakring, Stockholm, the 928 billion Swedish kronor ($96 billion) workplace retirement plan provider, said in telephone interview that the Green Deal will strengthen the pipeline of investible projects.
“We hope that the deal creates pathways for investors like us,” Mr. Billing said. Alecta, which continually seeks green investments that meet its requirements, had 40.6 billion Swedish kronor invested in green bonds and 10.6 billion Swedish kronor in social and impact bonds as of Dec. 31.
“We want to invest in green financing,” added Diane Griffioen, head of investments at Stichting Pensioenfonds ABP, Heerlen, Netherlands, who is based in Utrecht, Netherlands, in a telephone interview.
For example, by 2025, the €465 billion pension fund will specifically invest €15 billion in projects that are supporting the objectives of the United Nations’ Sustainable Development Goal 7, which is aimed at creating affordable, reliable and sustainable modern energy sources. Those expected projects fall under the fund’s new sustainable policy launched Feb. 3.
ABP intends to grow the share of its portfolio that is devoted to sustainable development initiatives to 20% by 2025, from 14% currently.
Starting in 2021, InvestEU will help asset owners enter investments similar to the Danish renewable energy fund Copenhagen Infrastructure Partners II, launched by money manager Copenhagen Infrastructure Partners in 2015.
The project, after receiving a European Investment Bank-guaranteed first-loss protection from a prior EU investment initiative — the European Fund for Strategic Investments — opened up to pension funds investments in biomass power plants and offshore wind farms in the U.K. and Germany.
For example, the €32 billion PensionDanmark, Copenhagen, invested €540 million in the fund in 2015 that saw a total of €2 billion in commitments from 19 institutional investors.
The fund’s combination of equity and debt structure, supported by a guarantee from the EU budget, made the level of leverage tolerable for institutional investors, according to an EIB document.
The guarantee to be provided by the commission under the Green Deal can help finance companies that are currently not attractive investments. For example, companies offering new technologies or companies transitioning away from unsustainable business models.
When the risk for institutional investors is too high or the return too low, but the government can take the first loss, then such an investment can become attractive to investors, ABP’s Ms. Griffioen said.
For investors seeking alternative investments with impact, measuring that impact against the Sustainable Development Goals is what will differentiate the opportunities under the Green Deal from, for example, private equity investments, CPEG’s Mr. Haenni noted.
With fewer options available on the impact side, it is hard for investors to find projects that meet all of their requirements, Mr. Haenni added. Existing projects might not provide enough diversification or have low enough risk at the same time, he said by way of an example.
Among key upcoming initiatives, the commission will present a green financing strategy in the third quarter of 2020, outlining how private-sector companies could contribute to the financing of the energy transition.
Alongside financing of companies or green loans, investors also want to see the EU stimulate the supply of green and social bonds through an issuance of EIB-backed bonds.
Under the Green Deal, the European Investment Bank will issue bonds that are directly linked to the sustainable requirements under the upcoming EU green finance regulatory package, which effective at the end of 2020 will require investors to report on the alignment of their portfolios to the United Nations’ SDGs.
Among the new standards, issuers of green bonds in Europe will also be required to align with the regulation.
An EIB official, who declined to be named, said in an emailed comment: “Green bonds are particularly important in the context of the European Green Deal, since they require systematic impact measurement, reporting and verification that the capital markets can understand and help steer.”
Ms. Griffioen said ABP wants to see more green bonds as well as social or smart city bonds, which are issued to create social impact or stimulate the development of sustainable cities, respectively.
Source Pensions&Investments