Source: EDHECinfra, MSCI.
As discussed in a recent insight renewables now dominate private investment. However, the current level of investment in sustainable infrastructure, including renewables, will be insufficient to meet global climate transformation targets. As a result, improved data on the financial impact of Environmental, Social, and Governance (ESG) factors will be necessary to attract the required level of private investment.
Investment in renewable energy generation projects increased by more than 80% in the last decade, going from USD 40 billion in 2010 to USD 73 billion in 2020, accounting for almost half of the total private investment in infrastructure over that period. At the same time, the investment in non-renewable energy projects fell to a third of its earlier value, going from USD 46 billion in 2010 to USD 16 billion in 2020.
This interest in renewable energy generation has been led by high-income countries, where renewable energy generation accounted for almost 55% of the private investment in infrastructure projects in 2020. In middle- and low-income countries, only 21% of private investment in infrastructure went to renewable energy generation, while 26% went to non-renewable energy generation.
However, these levels of private investment in renewables and other sustainable infrastructure are not enough. In 2021, the IEA forecast that wind and solar capacity additions must quadruple by 2030 to reach global net-zero emissions by mid-century, with most of this growth potential residing in emerging markets. Consequently, more private investment in sustainable infrastructure, including renewables, will be needed and so a case for its attractive financial performance must be established.
Unfortunately, there is a lack of robust data on the financial performance of sustainable investments in relation to other infrastructure projects or other sectors. Evidence to support the impact of ESG factors on the financial performance of infrastructure assets is limited or non-existent, and remains largely confined to ESG reporting and targeting.
However, by using a set of unlisted wind and solar companies (from EDHECinfra’s InfraGreen index) as a proxy for sustainable infrastructure, we can see signals of superior performance for sustainable investments which are outlined below.
Over the past decade we have seen strong increases in returns for listed and unlisted infrastructure equities, with unlisted infrastructure equities delivering higher risk-adjusted returns than both global equities and listed infrastructure equities. Among unlisted infrastructure equities, wind, and solar unlisted equities (which account for 90% of renewable energy investment) generated a compound annual return of 16%, outperforming the compound annual return of 12% for unlisted infrastructure equities and 6% for listed infrastructure equities. This superior financial performance correlates with the rapid growth of private investment in renewable energy projects.
Advancements in financial, contractual, and technological innovations, coupled with active government support, have enabled commercialisation, and made renewable energy generation more attractive to private investors. However, more data is needed to investigate the link between ESG and the financial performance of infrastructure investments to entice more private invest into sustainable infrastructure in developed and developing economies to accelerate the climate transformation agenda.