Energy is an indispensable asset. After food, clean water, healthcare and shelter, energy has become a necessity of modern life. Access to it enables economic development. The current energy consumption patterns, however, have a profoundly negative environmental impact. For many years already, scientists, environmental protection agencies and many different government and non-governmental organisations express their concern about the local impact of fossil fuel production and the air pollution caused by high levels of energy consumption, especially in densely populated areas. Over the last 20 years, evidence of a much more complex, all-encompassing environmental impact of our energy consumption has become apparent: worldwide climate change. Increasing scientific evidence and extreme weather conditions have served as a wake-up call and have led to demand a drastic change in our energy production and consumption.

Renewable energy required

Given the mounting environmental and climatological problems, and also the rapid depletion of fossil fuel sources, a transition from our current carbon-based energy system to one powered by renewable energy sources is necessary. In combination with increased energy efficiency we may yet be able to stem the tide. Wind and solar energy, hydropower, geothermal power and energy from biomass are viable alternatives to oil, natural gas and coal: no more CO2 pollution and damaging extraction methods that destroy our environment and cause global warming.

A transition from our current carbon-based energy system to one powered by renewable energy sources is necessary.

Also stimulating the urgent need to develop clean and renewable energy sources is our current inability to meet future energy demand in developed and developing countries. Energy demand will keep on growing, whereas the traditional energy sources will be depleted in the not-too-distant future. There is a wide-spread consensus that efficient and low-cost energy solutions play an all-important role in ensuring that more people get access to clean energy and thus will be able to improve their living conditions.

Solar Plant Helium in Aude, France
Solar Plant Helium in Aude, France

How can investments contribute to our energy goals?

Several pension funds are considering selling or diminishing their exposure to fossil fuel-related companies because of their unsustainable business case in the long run. Could this be a prelude to a large shift into clean energy technologies and clean power generation? Can the business case of investing in renewable energy compete with that of fossil fuels in the short term, given renewable energy’s limited availability, the lack of fair pricing and the problems of transportability?

For the institutional investor, the technology risk has always been a determining factor to step in at later stages or not to invest in this sector at all. The current trend shows large investors taking over operational assets and operational portfolios that were initially held by impact investors. The latter position themselves with their extensive knowledge and long-term experience in defining solid contractual structures and identifying the risks, including all the governmental programme changes.

Divestment in fossil fuels

Evidence of fossil-­fuel divestment being a feasible and prudent way to address portfolio risk, is increasing. For institutional investors investing in renewable energy, it becomes more attractive also from a financial point of view. It is only a matter of time before climate change regulations and policies will affect the valuation of companies active in the fossil fuel sector. And it will become increasingly important to investors to anticipate this change. The energy sector has already been influenced by drastic governmental measures and adjustments and this is not over yet.

Large institutional investors have the power to influence politics and may therefore help shift the focus. Supporting fair pricing for energy will mitigate the large adjustment and will divide scarce resources more equally and fairly amongst the different parts of the world, and in time, the different generations. Pension providers and large insurance companies usually have a long-term horizon. They are therefore well-suited to follow impact investors more closely, as this group has already investigated the risks and mitigated them with their type of funding.

For an overview of our activities in energy and climate, please visit the Energy and Climate investment strategy page.