Making the Case for Norway's Sovereign Wealth Fund to Diversify into Renewables

Experts make case for Norway's Sovereign Wealth Fund to Diversify into Renewables
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The Sector is Growing, Returns Are Reliable, the Outlook is Positive

Norway’s management of its vast national wealth - held in the world’s biggest sovereign wealth fund - is at an historic crossroads.

Indeed, it is facing an unusually opportune moment this summer, as parliament considers granting the fund a mandate to invest up to 5 percent of its US$880 billion in unlisted infrastructure, including renewable energy projects like solar plants and wind farms.

The fund would be joining a growing investment trend - 62 percent of sovereign of wealth funds held infrastructure investments in 2016 and an additional 7 percent were considering doing so. Perhaps more importantly, it would allow the fund the capture the value and reap the returns from investing in the rapidly increasing renewable energy sector.

We’ve just published a report that outlines how the fund, technically known as Government Pension Fund Global (GPFG) can proceed and describes the opportunity in renewable energy infrastructure in detail. One of our core findings is that renewable energy assets yield returns and retain value when they are bought and sold - making them highly profitable investments.

The fund’s manager, Norges Bank, first recommended it be given the mandate more than ten years ago. But Norway’s Finance Ministry has remained reluctant to approve it. Now Parliament has the chance to change the situation.

Investing in renewable energy does come with risk from regulatory changes or political fluctuations. But - as with other sectors like telecommunications and transportation - these risks can be mitigated, as well-managed funds have been demonstrating for quite some time now. Our report shows how a combination of establishing in-house expertise, co-investing with other partners and good strategy can accomplish this.

Infrastructure is a long-established asset class embraced by many of the world’s leading investment funds, and it is expected to keep growing. Growth across the global economy over the next several years is expected to create demand for US$3.3 trillion in various infrastructure investments, particularly in emerging economies. At the same time well-managed infrastructure investments bring returns of 12 to 15 percent annually.

Renewable energy accounts for roughly 42 percent of all unlisted infrastructure transactions. It has practically becoming a separate investment vehicle unto itself. Brookfield Asset Management, among the models mentioned in our report with considerable holdings in renewable energy, operates exemplary funds that return 10 to 20 percent annually. The industry outlook is positive. Wind and solar developers are offering competitive prices for power generation - lowering the cost of electricity in countries around the world. More and more governments also recognize that technology-driven, market-based renewable energy solutions will help address climate change—a fact that further increases their appeal and that adds to the growing global momentum around renewables.

The renewables sector is no longer the experimental space it once was, having entered a long-term growth cycle with a strong outlook driven by low costs, competitive prices, policy advances and rapid uptake. The sector is also diversifying by adding wind and solar investments to long-held hydropower portfolios.

Our report includes five recommendations on how Norway can move forward:

1) By granting managers a mandate to invest 5 percent of the fund’s assets in unlisted infrastructure, including renewable energy investments.

2) By expanding GPFG specialized in-house professional staff resources, with a focus on developing a team comparable in quality to those found among other top institutional investors.

3) By establishing partnerships with established investment funds that have a track record in the unlisted infrastructure field, and co-investing with those funds under mutually beneficial arrangements.

4) By setting aside a portion of the fund’s infrastructure investment for listed utility companies that have significant and promising portfolios in renewable energy.

5) By putting a firm and prudent commitment in place to invest in infrastructure projects in emerging markets.

These five moves would allow the fund to capture value from a growing market that offers reliable returns. These investments would not be correlated to the fund’s equity and bond portfolio, which is to say they would add risk diversification. They would provide steady cash flow and they would be anti-inflationary.

The opportunity in infrastructure investment is enormous and immediate—in developed and emerging economies alike—and the risk is manageable.

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