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Can you get in on the renewable energy boom?

Unfortunately for small investors, the answer is ‘not yet’.

CAPE TOWN – South Africa’s energy sector is not exactly the source of much good news. The problems at Eskom run deep, and that is what we tend to focus on.

However, there is an area where the power utility and the government are really excelling, and that is South Africa’s renewable energy programme. Despite, or perhaps because of the troubles this country is having with power generation, the renewable energy drive launched in 2011 has become a world leader.

At Moneyweb’s recent energy roundtable discussion sponsored by Standard Bank, the head of renewable energy, power at infrastructure at Standard Bank, Rentia van Tonder, pointed out that there had already been a total investment of R192 billion committed to this sector since the Renewable Energy Independent Power Producer Procurement programme was launched.

“We’ve already seen 92 projects all of which would produce about 6 328MW,” Van Tonder said. “The process has also brought down the cost of renewable energy.”

She added that this was a sector, experiencing double digit growth. That means that it is not just appealing from the point of view of mitigating some of the country’s power problems or even because it is creating sustainable solutions. It is also a great investment opportunity.

However, the only investors that are currently able to play in this space are banks, pension funds and asset managers. There has been no opportunity as yet for an individual to get a piece of the action.

“Investments in the renewable energy space are either through debt or private equity,” explains Jon Duncan, the head of sustainability research and engagement at Old Mutual Investment Group. “So its mostly institutional investors that have access to it, although a private investor may be able to do so through a private equity fund of funds. But there you are probably talking about a minimum investment of R100 000.”

As there is currently no listed vehicle that is an exclusive renewable energy play, small retail investors have no way to access this theme. However, the industry is still very young, and as it develops, such opportunities may well start to appear.

“As the South African market matures you might start seeing private equity partners exiting their investments,” Duncan explains. “And certainly the potential exists for somebody to aggregate these private equity stakes into a vehicle that becomes listed and individuals can then invest in.”

Interestingly, Duncan believes that the demand from investors themselves is a likely reason that such listings could happen.

“Globally, sustainable investing has largely been the domain of large institutional investors followed by family offices and high net worth individuals,” Duncan says. “What we are starting to see, though, is the emergence of the retail investor seeking and demanding a greater product offering.”

Around the world there has been a surge in interest amongst retail investors wanting to access sustainable investment themes, and this is ultimately what is leading product providers to come up with suitable vehicles.

One of the significant trends is the creation of index tracking products. These may be created by taking a parent index and re-weighting the constituents based on environmental, social and governance (ESG) factors, or through a best-of-class approach that selects the top performers in the index on a particular factor.

The result has been passive products that ultimately show marginal deviation from the index in terms of performance, but with significantly improved ESG metrics. That means investors are getting the same risk-return profile from a short term point of view, but greatly reducing their exposure to long term risk factors.

Old Mutual is already offering these kinds of products to institutional investors in South Africa, although only based on offshore indices. The jury is still out on whether it would be effective to do something similar for a market as concentrated as the JSE.

“We have seen a lot of uptake of these kinds of products from mid and small size pension funds who want to do something around ESG themes,” Duncan says. “They may have been getting offshore exposure by tracking MSCI world index, for example, and they can now track a sub-version of that index and get the same risk and return, but by holding a basket of companies that is better for the planet.

“Effectively, they are voting with their feet. They are putting capital towards companies that produce a market equivalent return, while at the same time presenting lower long term risk on ESG factors. We would argue that’s quite a good way of getting a free option on the long term mis-priced risk those factors may represent.”

In time, these passive products will almost certainly also become available to retail investors. And as interest develops, Duncan believes there will be more product offerings in the local market geared towards sustainable investing.

“It wouldn’t surprise me if you start seeing a lot more innovation in the domestic equity market,” he says. “Particularly because you have stronger data sets with better history now. Three years ago you couldn’t even have a conversation around this, but now we have history of how counters perform on an ESG basis, so one might anticipate that as pressure starts to emerge from the retail market and as the availability and quality of data on listed counters starts to emerge, you may start to see that innovation.

“But certainly a good start for the retail investor is to have a conversation with their adviser to ask what long term risk am I exposed to from an ESG perspective, how can I hedge that risk, and how can I be sure that the asset manager managing my assets is managing these risks in an appropriate fashion?”

This article is part of a series sponsored by Standard Bank Business Banking. Should you require further information about raising funding for a business in the energy sector please e-mail Moneyweb MD Marc Ashton (marc@moneyweb.co.za) with details of your project and he will connect you with an appropriate banking resource.

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