Private renewable investments can offer appealing and diversifying returns tied to enduring trends like AI and the low-carbon transition. (UBS)

In comments on 6 June, International Energy Agency (IEA) Executive Director Fatih Birol estimated that 2024 global investment of USD 2tr into renewable energy would be double the level of investment in traditional fossil fuels. The IEA expected China to account for the largest share of investment this year, spending an anticipated USD 675bn.

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Recent challenges have weighed on renewable energy investment.

  • Concerns about higher-for-longer rates and cost pressures have hurt public equity strategies in renewable energy.
  • The MSCI Alternative Energy Index fell 32% over the five quarters to end-March 2024, compared to an 8.2% climb in the MSCI World Energy index

But large investment gaps, corporate investment, and government policy are turning more supportive.

  • The Global Infrastructure Hub expects the world's infrastructure investment gap to widen to USD 15tr by 2040, presenting a considerable untapped opportunity.
  • Global annual renewables capacity additions increased by almost 50% in 2023, the fastest growth rate in two decades, according to the International Energy Agency.
  • Government policies like the Inflation Reduction Act in the US and the European Green Deal provide a favorable landscape for private investments in renewables, in our view.

So, private infrastructure can augment and diversify returns in long-term portfolios.

  • Renewable power asset returns could range between 8% and 13%, based on GSAM data.
  • More broadly, infrastructure assets can help diversify portfolios, with correlations of between –0.2 and 0.6 to other asset classes between 2005 and 2022, according to Cambridge Infrastructure Index data.

Investment view

We believe private infrastructure investments in renewables can help diversify portfolios due to their low correlation to other asset classes and provision of alternative, stable income streams that are often tied to inflation. This approach may also help investors achieve their sustainability and impact goals. However, investors should consider the risks inherent to private markets before investing, including illiquidity, long lockup periods, leverage, and over-concentration.

Main contributor: Matthew Carter

Read full article UBS House View Briefcase: Why look at private investment in renewables? 13 June 2024