Staying safe in the sun: why are pension funds snapping up solar bonds?

| 4 March 2013 | 6 Comments

Thousands of UK workers are already investing in renewable energy, possibly without knowing, via their employer pension funds, says Rebecca O’Connor

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Pension funds are finding that the sun can give them the kind of opportunity they need to fund the retirements of company employees.

The £4.6 billion Lancashire County Pension Fund has bought a 23.5 year solar bond in a community-owned solar power plant in Oxfordshire, for £12 million.

The bond gives the pension fund a return “3 percentage points above the retail prices index”, according to Investment Pensions Europe, the institutional investment service.

It might sound like a bit of a green-y departure for a fund that has the responsibility for employees’ retirement income, but by no means is a pension fund investing in a solar park a unique phenomenon.

Back in December last year, Pension Insurance Corporation (PIC) bought a £40 million, 24-year bond from Solar Power Generation, at a 3.61 per cent inflation-linked yield.

PIC said at the time that the bond “provided a good match for its pension liabilities as it offers a predictable, inflation-linked cashflow from a regulated company for 24-years.”

Solar projects are interesting to institutional investors such as pension funds.

These funds invest large sums of money, usually millions of pounds, on behalf of company employees who are saving into their work pension schemes.

Because these funds are entrusted with people’s retirement savings – a Herculean responsibility – their priorities when considering what to invest in are that the investment offers stable, secure, long-term returns, which beat inflation.

There are relatively few such investment opportunities around in today’s high inflation, low interest rate environment.

But solar can be one of them.

And what is interesting about this, is that the investment is not usually ethically-motivated, as you might expect, but driven by risk aversion.

“There is a business case for investing in renewables. They represent a good, long-term investment and nod to broader concerns.”

Mark Robertson, head of communications at the Ethical Investment Research Service (EIRIS), says1: “It is fair to say that in the UK and across Europe more funds are looking at Ethical and Social Governance (ESG) and responsibility. But such a strategy is more about reducing risk than being ethical.

“For instance, a pension fund with an active ownership strategy that votes on ESG issues and engages to improve the fund’s ESG performance will do so because a fund that is aware of and addressing things like climate change in its investment strategy is likely to be making better, more intelligent decisions to improve its financial performance in the long-term.”

“ESG issues affect risk. If a company is not looking at the environmental or carbon impact, then that company is exposed to things like legislation, accidents like the BP oil spill in the Gulf of Mexico and the ramifications of GM crops. These are all high risks to some businesses and climate change is certainly likely to be an issue for a fund that is making investments sometimes for terms of 40 or 50 years.”

Part of the security of solar comes from the Feed in Tariff (FIT): the government subsidy to the solar sector.

FITs are “guaranteed pence per kWh” payments for electricity generated renewably. The payments are set based on the installation date, but are index-linked, rising each year with inflation. They are there to help the sector to grow, which in turn will help the Government meet its carbon emission targets. FITs are regulated by OFGEM, the Office of Gas and Electricity Markets.

The technology behind solar is another reason that the investment could be considered relatively secure: solar panels do not require much maintenance and rarely, if ever, fail. This is also the reason that insurers can often see them as quite a sound underwriting proposition.

Mr Robertson adds: “There is a business case for investing in renewables. They represent a good, long-term investment and nod to broader concerns.

“Local authorities especially are uniquely placed with a broad remit to improve and be sustainable as part of their local agenda. Although some are more progressive than others.”

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1 All opinions and comments mentioned on the Trillion Fund website are the personal views of individual contributors and representatives of the renewable energy projects mentioned. Trillion Fund takes no responsibility for these views.

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