Finally, after years of dancing around the asset class, it seems that Norway’s Nkr 8.25 trillion ($971 billion; €859 billion) sovereign wealth fund has warmed up to unlisted infrastructure. Or to be more precise, to unlisted renewables infrastructure.
We’re being somewhat cautious, because it’s not the first time the Government Pension Fund Global has been nudged to invest in infrastructure only to get a firm ‘nei’ from the government later on. That stance began to thaw last year, after Norway’s newly formed coalition government said it was considering “opening the [fund] to invest in unlisted infrastructure and unlisted companies”. And last week, Norway’s finance ministry proposed that the fund invest up to 2 percent of its assets in unlisted renewables, a proposal that is still subject to parliamentary approval.
That’s a whopping $19.24 billion. To put that figure into perspective, data from sister title Infrastructure Investor show that just shy of $15 billion has been raised by renewables-dedicated unlisted funds since 2013. The GPFG could, in theory, buy most of those funds’ assets if it wanted to.
In fact, it might just do that, considering it is looking to invest “with partners in developed markets, and in projects with relatively low operational and market risk”. But of course there are plenty of corporates – think Orsted – which could easily fit that bill too.
What is less clear at this stage is what made the government change its mind. We don’t want to spoil the party here, but most of the objections it raised two years ago – that it’s hard to quantify the advantages of unlisted infrastructure or that such investments would expose the fund to political and regulatory risk – also apply to unlisted renewables.
Take exposure to political and regulatory risk. In the “developed markets” the GPFG wants to target, there have been retroactive changes on renewables policy. In Europe, such changes have happened in Spain, Italy, the Czech Republic, Poland and the UK. Taiwan offered a very recent example of another government change of heart on renewables policy, while over in the US, President Donald Trump has just claimed that wind turbines cause cancer and lead to lower house prices…
That’s not to say renewables are a bad place for the GPFG to start investing in unlisted infrastructure. As it correctly identified, “the market for renewable energy is growing rapidly”, and will probably continue to do so for a long time as the world’s economies seek to decarbonise and prevent the worst effects of climate change.
Although profitability is in the eye of the beholder, your average unlisted renewables investment certainly yields more than the -9.5 percent and 0.6 percent that the GPFG’s equities and fixed-income portfolios respectively returned in 2018. In that sense – and considering the fund stressed that its move into renewables was “not a climate policy measure” – it can expect returns similar to the 7.5 percent it is currently generating from its unlisted real estate portfolio.
Taking what little the GPFG has disclosed about its motives – that it’s investing in renewables not as a “climate policy measure” but as part of a search for profitable investments – the obvious next question for it is: why not invest across the wider unlisted infrastructure spectrum? After all, renewables are no more insulated from political or regulatory risk than are the asset class’s other sub-sectors, nor are the advantages necessarily any easier to quantify.
We could certainly understand if the GPFG, fresh from deciding against further investments in the upstream energy sector, wanted to exclude certain parts of infrastructure from its mandate. But there doesn’t seem to be any obvious reason why the fund could not, for example, invest in digital infrastructure – another burgeoning market.
So while we commend Norway’s sovereign fund for dipping its toes into unlisted renewables, we hope it finds the water warm enough to take a proper swim in the wider unlisted infrastructure pond.
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