Institutional investors set to almost triple divestment from fossil fuels in the next decade, says survey

Global institutional investors plan to divest 15.6 per cent of their portfolios from fossil fuels over the next ten years, almost tripling outflows of 5.7 per cent planned for next year, as high-profile activism on climate change gathers pace.

That’s one of the key findings of a new report from Octopus based on a survey of institutional investors representing USD5.9 trillion under management. Among this sample alone, planned divestment will see USD920 billion assets moved out of fossil fuels over the next decade.  
The report reveals that renewable energy infrastructure is set to benefit from this asset shift, with institutional investors planning to ramp up allocations to renewable energy infrastructure to 5.2 per cent over the next 12 months, which will more than double to 10.9 per cent by 2029. This represents USD643 billion being ploughed into renewables over the next ten years by the Octopus survey respondents.
The report, The Great Transition: Opening the Renewables Floodgate, reveals that global financial institutions – particularly those in the UK – are optimistic about their ability to slow global warming. Indeed, 71 per cent of institutions surveyed globally stated that they believe investment strategies could be used to make a material difference to climate change outcomes.
Moves such as the UK Government’s commitment to a net zero target by 2050, and high-profile campaigning activity including Extinction Rebellion and Greta Thunberg, are spurring global institutions into action. According to the Octopus report, nearly half (44 per cent) of institutions have reconsidered their investment portfolio following increased climate change activism over the past year.
The research suggests that climate saving sectors such as renewables infrastructure look set to benefit from this positive action. The majority (69 per cent) of institutions say they believe renewables can play a significant role in tackling climate change and demand for these assets is growing. Since Octopus first surveyed institutional investors in October 2018, demand for access to renewable energy assets has risen by over a third (37 per cent).
Yet, despite these positive findings, the report suggests a smaller but still significant proportion of institutional investors remain resistant to tackling global warming through their investment strategies, with more than one in five respondents (23 per cent) yet to make any change to their portfolio in response to climate change. Separately, 16 per cent of institutions surveyed have no allocation to climate-saving sectors at all, accounting for around USD1 trillion of assets under management. Among this group alone, there is significant capital which could be deployed as investment into renewable energy infrastructure.
Institutions surveyed by Octopus identified a number of barriers to greater investment in renewable energy infrastructure. Almost half (45 per cent) of global respondents cited energy price uncertainties as a key blocker, followed by a lack of renewable energy investment skills within their own organisation (36 per cent) and liquidity issues (19 per cent).
According to Octopus, this signals the need for specialist managers to widen renewable investment products for institutional investors, especially in an environment where government subsidies are diminishing.
Matt Setchell, Co-head of Octopus Renewables, says: “Our children’s futures will be shaped by decisions that are made now by the global investment industry. Given the scale of the challenge and the limited time we have to make a change, the guardians of trillions of dollars of capital have a crucial role to play in averting a climate crisis. While the report provides a glimmer of hope that this change will happen, we can’t rely on divestment from fossils fuels as the only answer.
“It’s disappointing that the proportion of capital divested from these assets and reinvested into climate-saving causes such as renewables and clean tech isn’t higher. If we are to unblock investment into these areas, institutional investors will need to become comfortable with different types of investment risks. This in turn demands better, wider-ranging products to accommodate institutional investors’ objectives, so more of them feel ready to divert funds into assets that will help save the planet.”
Alex Brierley, Co-head of Octopus Renewables, says: “Transitioning to a renewable energy future is challenging, but vital, and we still need to make bolder commitments on this front. Institutional investors can play a critical role in reaching this global goal by galvanising capital towards renewable energy infrastructure.
“While there is significant work to be done here, we are optimistic about the future. Our research shows an increased demand from global respondents for greater access to renewable energy infrastructure. We are seeing a growing awareness that the asset class can both generate long-term, stable returns for investors and have a positive impact on climate change.”