Central banks around the world have kept interest rates extremely low to spur economic growth since the financial crisis of 2008. This has left fixed income investors searching for investments with higher rates of return to replace the yield lost from the current global interest rate regime. Liability driven investors, like pension plans and insurance companies, are particularly impacted as they depend on fixed income returns to match to their annual outflows. Over the past few years, institutional investors who normally invest in government bonds for their security and stable returns, have ventured into corporate bonds and even emerging market debt in search of higher yields. Investors found the yield they were looking for, but sacrificed the security of government bonds.
As low interest rates continue to persist, institutional investors have found a new source of yield with a similar stability and risk profile as government bonds. Clean energy infrastructure assets offer predictable cash flows and yields 2-5% higher than comparable term government bonds. Pension plans and insurance companies hungry for higher yields with as little risk as possible have been making large investments in clean energy infrastructure assets.
Recent investment activity by pension funds and insurance companies in clean energy infrastructure include:
PensionDanmark has committed to investing 10% of its $22 billion pension fund in clean energy infrastructure assets
Pension funds from around the world bought up $160 million of a recent $250 million green bond offering by the European Bank For Reconstruction and Development
German insurance giant, Allianz, added three wind farms to its clean energy portfolio in September, bringing its clean energy capacity to more than 1,000 megawatts or enough energy to power over 500,000 homes
Whether institutional investors continue investing in renewable energy infrastructure will be largely determined by the spread between the interest rates on government bonds and those available on clean energy infrastructure. Last month, most investors expected Federal Reserve Chairman Ben Bernanke to announce the winding down of the massive monetary stimulus, instead he did the opposite and announced its continuation. By continuing to purchase bonds on the open market, the Fed will keep interests low for the foreseeable future. The expectation among policymakers is interest rates will rise in 2015. With interest rates low for at least the next few years, the spread should continue to be wide enough to make clean energy infrastructure an attractive investment for investors in search of stable, high yielding returns.
Institutional investors are not the only ones finding yield in clean energy infrastructure, so are individual investors. With certificate of deposits (CDs) and treasury bonds offering low rates of return, individual investors are finding higher yields by investing in solar energy projects on Mosaic’s online platform. Mosaic projects offer investors returns of 4.5-7% with tenors of 8-12 years.