Advising Pension Giants as they Boost Global Renewables Investment
It could be argued that leading pension plans have become harbingers for the world’s institutional investors. Keenly attuned to changing mandates, pensions across North America are asking different questions of their investment banking partners in 2021. That reflects shifting priorities—particularly towards ESG and sustainability, but also towards allocative balance between traditional public market instruments and real assets that fit the risk profile and long-term liability requirements the pension funds must meet.
Nowhere has this fusion of purpose and performance been more potent than in renewables investment. Multiple US and Canadian giants have focused their efforts and dollars as sponsors for recent projects around the world. These exciting forays require different areas of expertise, relationships and financing structures borrowing from several corners of their partner bank’s capabilities.
Olivier Akian, who leads the coverage of financial institutions for Societe Generale in Canada, says, “When we advise pensions on their renewables investments, we regularly corral a range of specialists, including those from our infrastructure and renewable finance team, and our global markets team to provide the advice and services our pension clients need.” As a result, these engagements have helped grow an entirely new practice that can shape, fund and execute upon these projects successfully and repeatably.
Getting Real on Real Assets
At a philosophical level, the reasons pensions would want to emphasize renewables infrastructure are fairly clear — picture sustainable investment, and a farm of wind turbines across a sweeping landscape is probably first thing that comes to mind. At an institutional level, renewables are also a direct route to broad-based ESG effectiveness, and many investment teams now incent their members to overperform in this area.
Still, even if renewables are a natural choice, Akian says that many pensions are apt to also prefer them for their financial attributes as real assets, too; after all, today there are myriad routes to similar exposure in publicly tradable securities. The question then is: why take on this growing energy sector on a project finance or public-private partnership (P3) basis?
The answers are simple but profound. One, says Akian, lies in the uniqueness of each opportunity. “Like any investor, pensions like to be first in line. Taking this approach allows them to analyze the full range of bespoke opportunities in renewables, leveraging their size and reputation to create investments that are tailor-made to risk requirements and are highly differentiated.”
Another answer lies in guarantees on timing and control: concession agreements typically extend many decades and are often backed by government, meaning an attractive rate of return can be virtually locked in. Finally, but in no way trivial, is the value of the clear and hands-on message these pensions can take back to the public — inspiring pride in leading the energy transition in a way that a simpler allocation may not.
Holistic & Coordinated Approach
Of course, the reasons why this sector is so intriguing also make it interesting for investment banking teams. Advisory is required from multiple perspectives as these projects are incorporated into a pension’s portfolio. Even for major mandates accustomed to having some private infrastructure investment on their books, scaling real assets up to parity is a challenge and demands a holistic and coordinated approach that often crosses continents with boots on the ground.
This starts with sourcing and evaluating projects, structuring the financing required at every stage, potentially developing the market for external partners, writing agreements for external risks and contingencies, and ultimately assessing how the project affects the pension’s remaining exposure across a number of asset classes—whether it be toll roads, utilities, renewables or real estate. Akian says that while the temptation would be to view each of these projects as a one-off, “the real objective is to create an operational partnership that can develop them continuously and end-to-end, working the tactical challenges but also thinking strategically about the pension client’s broader goals.”
From there, Societe Generale strives to advise the pension on how this new asset augments their broader work on impact and sustainability, and where further work can be done to adjust their holdings to include the types of assets that will help realize their investment objectives.
Novel Becomes Normal
As real assets become a broader part of the future of pension plans, it will be imperative for their banking partners to build out new investment processes to match. Renewables will remain a key point of focus as investors continue to take greater steps to reduce or offset carbon, and governments around the world cycle through incentive programs and novel ways to attract institutional financing. Once effectively risk managed, there are simply too many good reasons to not pursue these opportunities—serving as the face of the latest industrial revolution in the eyes of history may simply be one.
At the same time, US and Canadian pensions continue to expand outwards to other higher-yielding projects and new asset classes such as fiber optics and broadband connectivity projects, building data centers, and investing in gigafactories and electric vehicle charging infrastructure to name a few ascendant examples. Becoming more diverse over time, these real asset holdings will only grow in stature and complexity for large investors—not just for pensions, but among asset owners of all kinds globally.
“That is the best reason for having integrated our financing and advisory capabilities in this area,” says Akian. “To be a genuine partner in taking what seems novel today and guide it as it becomes normal tomorrow.”