Survey reveals massive interest in green investments with many seeing them as a necessary addition to portfolios

Written by Ray Clancy

Monday, 09 August 2010 08:27

Over 90% of institutional investors want green investments in their portfolio, according to a new study.

Research commissioned by the New Energy World Network (NEWN) found more than nine in ten private equity, pension, insurance and venture capital funds would like to have some exposure to renewable energy, clean technology, and sustainability-related investments.

Two thirds, 69%, said they have already made green investments or are planning to do so in the next three years.

The research also found that the main motive for investing in green funds is the potential to generate high financial returns. However, environmental responsibility and social responsibility were claimed as motives by 64% and 59% of respondents respectively, as long as the return requirement was met.

Pressure from shareholders, beneficiaries or trustees affected around one third of investors, 36%, who said that this was a factor in their allocation decisions.

Pressure from governments and customers to pursue a green agenda influenced around a quarter of respondents, making such pressure significant in terms of effect, though not yet as important as other factors, the study also shows.
Institutional investors are positive about the longer term return prospects of green funds, with 72% believing such funds will generate returns at least as high as generalist private equity funds over the next ten years.

Over the next ten years 47% of respondents believe that green private equity funds will deliver similar returns to other funds, while another 22% believe they will outperform the general private equity market and 3% expect high outperformance compared to the market.

The research found that an astonishing 40% of respondents expect green private equity and venture capital funds to deliver a net IRR of over 20%, significantly higher than many LPs expect for the private equity market as a whole.

But the majority of investors currently allocate less than 5% of their planned investments to green funds but most expect to increase their allocations substantially over the next few years. Nearly two thirds expect to commit 5% of their overall private equity allocation to green funds in 2010 whilst 8% plan to commit over 20% of their total allocation for the year to the green sector.

Growth equity and expansion capital funds are regarded by three-quarters of investors as the most promising type of private equity funds for prospective returns. The next most popular fund category is infrastructure funds with 38% of investors regarding this category as attractive due to the relatively lower risk characteristics combined with prospective returns that are enhanced by governmental and regulatory support.

Then a third of investors regard buyout funds as attractive, reflecting the relative immaturity of the sector compared to the rest of the private equity market.

The main areas of interest to institutional investors are energy efficiency, energy storage and smart grid with between 33% and 45% of respondents regard these areas as offering the most attractive risk-adjusted returns over the next five years due to the pressing need to develop improvements in existing, industrialized markets and the relatively low technology risk compared to other sub-sectors.

‘There is strong expectation in the private equity industry that the performance of green investments will improve over the next few years,’ NEWN said in a statement.

‘The challenge for green private equity and venture capital managers is to accelerate the current levels of interest and future expectations into actual commitments into their funds sooner rather than later,’ it added.