6 March 2020
The climate clock is ticking. With no quick fix for mitigating the effects of greenhouse gas emissions, ever more difficult questions are being asked about how to preserve a world that is changing before our eyes. In the presence of such uncertainty, however, one industry is increasingly being looked to for answers: renewables. The last few decades have seen a boom in renewable energy investment, fuelled in part by favourable market conditions and generous feed-in tariff subsidies.
More recently, the combined effects of falling system costs, low to zero interest rates and increasing investor comfort with technology risk have boosted development of wind and solar projects even faster and further across the globe.
At the same time, a sudden upsurge in climate activism has begun to impact business models and mindsets worldwide, creating a fresh sense of urgency and new opportunities for investors.
The risk with mainstreaming
Renewable energy projects are proving they can deliver stable, long-term returns at levels above traditional fixed-income vehicles. As a result, the sector has attracted new investor classes, such as private equity funds and publicly traded alternatives, in addition to large institutional players.
This mainstreaming of renewable technologies means barriers to entry have become lower and the market extremely competitive. However, this brings challenges of its own, says David Swindin, head of Europe at Cubico Sustainable Investments.
“The issue with mainstreaming is the associated risk of short-term opportunism. The reality is renewable energy assets are complicated to operate, not straightforward. Things go wrong over a life period and new entrants do not always fully understand the market complexities,” he says.
Cubico is a long-term owner and operator of renewable energy projects, committed to playing a significant role in the transition towards a clean energy world. Being jointly owned by Ontario Teachers’ Pension Plan and PSP Investments, the company is not in the business of chasing high returns at any cost. Sustainability is at the heart of the business, which is driven to create long-term value for its shareholders, while caring for local communities and the environment.
A global business
With an installed capacity of 3.3GW, Cubico’s portfolio could generate enough energy to supply more than 1.7 million average UK homes and offset around seven million tonnes of coal-fired CO₂ emissions a year. The international scope and scale of Cubico involvement covers the whole energy chain, from development and construction, through to operation. Its portfolio includes onshore wind, solar photovoltaic and solar thermal.
Having a firm foothold in 12 countries across Europe, the Americas and Oceania, Cubico is headquartered in London, with regional offices in cities around the operational map, Madrid to Montevideo. This on-the-ground presence provides for excellent local knowledge and strong relationships.
Such a global mix of assets also means there is no simple one-size-fits-all approach for the energy investment portfolio. Different approaches work in different places, says Swindin.
“The developed world is all about transitioning away from coal. In the developing world, the focus is on connecting people with increased electricity demand. Both scenarios, however, point in the same direction: renewables offer the cheapest form of generation and the fastest growth,” he says.
ESG as a driver
Divesting from fossil fuels, especially coal, is an increasingly common story for pension funds and banks looking to align their portfolios with environmental, social and governance (ESG) criteria. In fact, it was a perceived need to decarbonise an economy heavily reliant on coal that prompted Cubico to re-enter the Australian market in recent years.
For Cubico, though, ESG is about more than just decarbonisation, explains chief executive Steve Riley.
“ESG is a big thing for Cubico and our shareholders, but also for our stakeholders and our staff. People want to know both where their money is going in investments and where it is coming from in earnings. In our sector, ESG is now the new normal,” he says.
This profound commitment to ESG drives the company’s unique approach to corporate social responsibility, notes Olga Garcia, general counsel and head of corporate affairs.
“As a renewable energy business, it’s vital we recognise and act on our responsibility towards the environment and society. We take enormous pride in being able to combine our sustainable message with our cultural identity and corporate values through initiatives which promote the economic and social development of our local communities,” she says.
In 2019, for instance, Cubico joined forces with the Mexican Association of Solar Energy to bring solar-powered light to the Huichol community, living in a remote, mountainous area of the country. In total, some two million people in Mexico live without access to electricity in their homes, making daily tasks difficult and sometimes dangerous. In return for the solar kits, each family gave Cubico a small piece of art, which it later sold to raise money for rainwater collection systems for the community.
Sustainability over time
Being a long-term owner of assets not only delivers meaningful benefit to communities, it helps build local teams and in-house capacity too, bolstering credibility with government and regulators.
More stable and sustainable than short-term buyers, yet more dynamic and agile than slow-moving utilities, long-term private ownership is also ideally suited to manage market uncertainty; and disruptors are inevitable.
For the power sector, electric vehicles and energy storage are the two game-changers guaranteed to move the market over the next few years, one stimulating demand, the other tacking intermittency of generation. Servicing this need is a key challenge for both the energy industry and its investors.
The latest forecasts from Bloomberg NEF estimate that switching from two-thirds fossil fuels in 2018 to two-thirds zero-carbon energy by 2050 could mean 50 per cent of world electricity being supplied by wind and solar. This translates to wind attracting $5.3 trillion and solar $4.2 trillion of the massive $13.3 trillion investment needed into new power-generation assets.
These are huge numbers and long-term thinking will be critical to success. Riley concludes: “A long-term strategic vision allows you to build relationships with landowners, suppliers and other stakeholders. If they believe you are in it for the long term, you win their trust and their follow-on business too. It’s a virtuous circle and we aim for Cubico to be the partner of choice.”
Note: this article was originally featured in Raconteur’s Sustainable Business report, which was included in the 6 March 2020 edition of The Times and its tablet/iPad app.