92% of pension schemes expect to increase renewables as divestment slows amid Covid pandemic

The majority (92 per cent) of pension schemes plan to increase their allocations to renewables over the next three to five years, despite the pandemic slowing the pace of divestment, research from Octopus Renewables has found.

The company's report, Renewables and the recovery, found that almost half (46 per cent) of pension funds expected renewables to become the most attractive investment during the current crisis.

Over three quarters (76 per cent) of pension schemes cited pressure from millennials as boosting demand for renewables, which the report said had also been reflected in the Pension Schemes Bill currently working through parliament.

Furthermore, 91 per cent of pension schemes cited the prevailing low interest rate environment and volatility in equity markets as pushing them to seek uncorrelated sources of higher yield, whilst just under half (46 per cent) were looking for “stable and predictable” cash flow from renewables.

However, the firm warned that the pandemic will “significantly slow” the pace of divestment from fossil fuels, with institutional investors, on average, having divested just 1.9 per cent of their overall portfolio in 2020, compared to the 5.7 per cent forecast for 2020 in Octopus’ 2019 survey.

Instead, it revealed that investors now expect to divest 3.2 per cent over the next five years and 9.2 per cent over the next ten, compared to the forecasts of 11.4 per cent and 11.9 per cent provided by investors in 2019.

Liquidity concerns were one of the main barriers facing investors, with over half (51 per cent) of pension schemes citing this as the biggest challenge when looking to invest in renewables.

Commenting on the findings, Octopus Renewables co-head, Alex Brierley, stated: “Renewable energy has proved an incredibly attractive asset class in the face of this year’s volatility, buoyed both by growing external pressures to invest responsibly, and by investors looking for long-term sources of yield.

“There is further progress to be made however, and alongside renewables investment, divestment from fossil fuels also remains key.

"As gatekeepers to trillions of dollars, institutional investors have a critical role in fighting climate change.

“But to move the dial, investors have been clear that issues such as lack of government coordination, liquidity issues, and energy price uncertainty are standing in their way."

He added: “Alongside governments, specialist energy fund managers, like ourselves, need to ensure we make investments more accessible and encourage greater investment in renewables and divestment of fossil fuels.

“We also recognise that there will be multiple routes to market and that investors will be at different stages of the journey. But understanding of the asset class’ ability to provide stable, long-term returns, while helping save the planet is growing.

“It is critical we use this momentum to drive further positive change.”

The findings come amid the launch of an industry working group, to be led by the Financial Conduct Authority, Treasury and Bank of England, on enabling greater investment in 'productive finance'.

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