Is there a wind of change to pension fund investment strageties? « Mining Blog

Is there a wind of change to pension fund investment strageties?

17. August 2012,

Pension funds are “hunting for higher returns [by] buying direct equity stakes in wind power projects that are being shunned as too risky by banks and other investors”

So says a report by Reuters’ PlanetArk (15 August 2012), which describes the moves as a “major change for the funds, which favored government bonds for years until the debt crisis gripping Europe turned this once low-risk strategy on its head and drove down interest rates elsewhere, leaving few alternatives.

“Green power needs heavy investment if the European Union is to reach targets for boosting its share of total energy supply to 20 percent by 2020 and cut both carbon emissions and dependence on fossil fuels”.

However, “a funding gap has emerged because banks are staying away, in compliance with new rules aimed at reducing risk.”

Not that wind generation doesn’t have its own financial risks. The plants “are expensive to build and maintain” while “the plants can face logistical and technological problems connecting to the wider grid”, some pension funds are now “thinking longer-term, to steady cash flow over 20 to 30 years once projects are in place”

Among those now committed to wind power investment is Denmark’s state-owned DONG Energy, which “has enlisted several investors as it builds wind power projects off Denmark, the UK and Germany.”

There’s also Danish pension providers, PensionDanmark and PKA, along with Dutch pension group PGGM, as well as “industrial investors including the private owners of Danish toymaker Lego and Japanese trading house Marubeni”

PensionDenmark’s managing director, Torben Moger, predicts that other investment funds will follow suit “because the alternative of investing in government bonds provides such bad returns that you are obliged to identify alternative investments”

PensionDanmark’s total investment in DONG wind projects is 4.5 billion crowns and it plans to increase its allocation to alternative energy and infrastructure to 10% from its current roughly 6 %.

Comments PlanetArk: “It is no surprise that Denmark, world leader in wind energy, should spearhead new project finance in the sector. The country built the world’s first offshore wind farm in 1991 and now meets roughly a quarter of its electricity needs from wind energy.

“Many other pension funds and insurers are still put off investing in wind power by perceptions of regulatory risk and lack of knowledge about the industry. In Germany in particular this is hampering growth and industry targets.”

Nonetheless, “this is expected to change.The OECD estimated in a report published in September last year that less than 1 percent of pension funds worldwide were invested in infrastructure projects…[they]s may therefore play a more active role in bridging the infrastructure gap”

Indeed, “Europe’s biggest insurer, Allianz of Germany, has invested more than 1.3 billion euros ($1.59 billion) in renewable energy since 2005. Most of this is in wind farms in Germany and France, but also some solar power plants in France and Italy.”

According to David Jones, CEO of Allianz Specialized Investment, “returns on wind and solar projects are now around 7 percent – much higher than many other asset classes – and are totally decoupled from the ups and downs of the financial markets.”

Dutch pension group PGGM also “altered its strategy two years ago to become a direct investor as well as a fund investor in energy projects, and has since taken a stake in DONG’s Walney wind farm in the UK and in a large Mexico wind power project backed by Australian investment bank Macquarie.”

PGGM has reportedly allocated 15-20 percent of its infrastructure portfolio to renewable energy.

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