Norway’s US$900-billion sovereign wealth fund is at an “historic crossroads” as national legislators consider a mandate requiring it to invest 5% of its funds in “unlisted” holdings.
That provision would be the trigger for the Government Pension Fund Global (GPFG) “to capture value and reap stable returns especially from the fast-growing global renewable energy sector,” the Institute for Energy Economics and Financial Analysis states, in a news item on its own more detailed research report. Moreover, “the fund would be joining an investment trend that is gaining momentum—62% of sovereign of wealth funds held infrastructure investments in 2016, and an additional 7% were considering doing so.”
In an accompanying op ed, the Institute’s finance director, Tom Sanzillo, notes that “infrastructure is a long-established asset class embraced by many of the world’s leading investment funds, and it is expected to keep growing,” with estimated demand of US$3.3 trillion over the next several years. Renewable energy, which accounts for nearly half of all unlisted infrastructure transactions, “has practically becoming a separate investment vehicle unto itself.”
Some funds are delivering returns of 10 to 20% per year, he adds, and “the renewables sector is no longer the experimental space it once was, having entered a long-term growth cycle with a strong outlook driven by low costs, competitive prices, policy advances, and rapid uptake.”
Although fund manager Norges Bank first asked for the Parliamentary mandate a decade ago, Norway’s finance ministry sees it as a risky move, and “skeptics may very well argue that renewable energy comes with too much risk,” Sanzillo notes. But “while renewable energy is no more immune to regulatory and political risks than investments that include telecommunications and transportation holdings, these risks can be mitigated, as has been demonstrated for quite some time now by well-managed funds that have developed robust methods do just that.”
The IEEFA report recommends that Norway set the 5% mandate, boost GPFG’s in-house analytic expertise to match other top institutional investors, set partnerships with other funds that have experience with unlisted infrastructure, place a portion of its investments with listed utilities that already have a track record in renewable energy, and make a “firm and prudent commitment” to invest in emerging markets.