- One growing investment field is emerging market private equity and debt funds in African and Latin American renewable energy sources.
- Many investors hold on to oil and gas stocks simply to collect dividends, which causes the companies to increase debt and sell off assets.
- ‘Green’ investments once meant renewable energy, but have now spread across the energy, transportation and agricultural sectors.
With oil and gas prices down 30% for the year and fossil fuels becoming less attractive due to sustainability issues, investors are looking elsewhere in the energy sector. One growing area is in private equity and debt funds in renewable energy sources in developing countries.
“Developing countries’ renewable investment exceeded the level in developed countries for the first time in 2015,” Murray Birt, DWS’s senior environmental social and corporate governance strategist, told Karma in an email. “By 2019, developing countries accounted for 54% of renewable investment at $152 billion. While China and India have accounted for most of this, investment in other developing countries grew 17% in 2019 (year on year) to reach nearly $60 billion according to BloombergNEF and Frankfurt School 2020.”
Birt added that some of the most critical areas of investment are sustainable energy access in Africa and other developing countries — requiring $45 billion annually to provide renewable energy and clean cooking, which could transform the lives of millions by cutting down on the toxic fumes caused by cooking indoors with fossil fuels. That $45 billion is a drop in the bucket, he said, representing less than 2% of the global energy impact, according to the IEA World Energy Outlook 2019.
Elsewhere, the deal numbers are rising, including a focus from partnerships on climate change. “Private equity investment in cleantech/alternative/renewable energy in Latin America specifically has gone from $470 million invested across 35 deals [from 2014 to 2016] to $2 billion across 63 deals [from 2017 to 2019], according to data from our sister organization, the Association for Private Capital Investment in Latin America (LAVCA),” Cate Ambrose, CEO and board member of EMPEA, a global association covering private capital in emerging markets, told Karma in an email.
Andrew Behar, CEO of the shareholder-advocate organization As You Sow, told Karma that oil and gas investments have been underperforming the market for the past decade. Behar said there is more risk than meets the eye in this sector partly because companies have oil and gas reserves that may never be commercially realized, known as stranded assets, on their balance sheets, which inflates their value. He added that many investors keep oil and gas stocks simply to collect dividends; continuing to pay these dividends has caused companies to increase debt and sell off assets because they don’t have the cash in free cash flow.
A number of investment houses offer funds that focus on renewable energy sources and other sustainable investments, such as digitalization, artificial intelligence, automation, biotechnology, fintech and clean technologies.
However, investors may still view emerging markets as a risky proposition and choose different paths to change the equation in investments in fossil fuels. One is divestment, which is what the European insurance firm AXA has been doing by getting rid of coal investments. Another is shareholder activism, which has shown limited success, according to Birt, because the “largest asset managers and institutional investors have a very poor track record when it comes to voting in favor of climate resolutions.”
He added that investors can avoid that situation by selecting funds with strong track records of using their investor influence on companies and making sure their asset manager does more to keep their investments out of “carbon-intensive companies.”