Chris Hulatt, co-founder of the Octopus Group

Interest in sustainable investments has never been higher, but trillions of pounds is still needed to tackle climate change. 

Chris Hulatt, co-founder of the Octopus Group – one of the UK’s largest investment funds involved in the sector, explains why this burgeoning asset class could provide the positive impact many investors are searching for.

While everyone was getting to grips with wearing face masks on public transport and sending their teenage children back to school in the summer, the UK power sector broke a new record that largely went unnoticed. 

On 16 June 2020, the UK recorded its longest run of consecutive days of generating electricity without burning coal.

The significance of this 67-day milestone should not be overlooked, as it showed the huge strides the UK has made on reducing its carbon dioxide emissions. 

The UK has decarbonised its power generation more quickly than any other G20 country. A decade ago, wind and solar accounted for just 2 per cent of its electricity output. Today, it makes up 28 per cent.

But while the UK has taken a big step forward, other countries have been slower to act. 

Global emissions are still rising. We are on course to see the warmest five years on record, which puts the Paris Agreement goal of limiting the rise in global temperatures to 2°C in jeopardy. 

To avoid a catastrophic humanitarian and economic disaster, countries have no choice but to invest in renewable energy infrastructure. 

However, to meet net zero carbon targets, it is estimated that around £21trillion worth of investment into renewables will be needed by 2050.

There has been a groundswell of public support for more action to combat climate change, driven by passionate calls from high-profile campaigners such as Greta Thunberg and Sir David Attenborough, while the pandemic has arguably intensified the climate change debate. 

As a result, we are now seeing increasing numbers of investors wanting to put their money to work to make an impact on sustainability.

There is an overwhelming number of funds that offer environmentally minded investors a home for their money, but if you scratch beneath the surface, many environmental, social and governance funds don’t actually focus on making a positive impact on climate change, and some can feel a bit like a box ticking exercise. 

Investing in renewable energy is different. If you invest in renewable energy infrastructure funds, your money is being invested directly in carbon-free electricity projects. 

This is the bedrock of tackling climate change ­– removing carbon emissions from the power generation for our homes, transport and industry.

Renewable energy infrastructure funds predominantly invest in wind and solar farms, although there are opportunities to invest in a broad range of technologies, for instance, battery storage, hydrogen, biomass and many more. 

Frequent travellers on the UK’s motorways will have seen the growing number of solar and wind farms that are now visible across the many parts of the country. But some renewable energy funds will invest beyond the UK. 

There is a global opportunity to diversify as countries, such as Australia, look to up the ante in the renewable stakes.

If you want to increase the impact of every pound you invest, it makes sense to look at funds which also focus on building brand new renewable assets, rather than simply buying wind or solar farms that are already up and running. 

This is incredibly important as it actually increases the number of renewable energy assets across the globe, as opposed to just moving them from one fund manager to another.

A rare source of reliable income 

Most renewable energy funds derive their returns not from capital growth but from income, offering some much-needed respite to income-seekers who are fast running out of options. 

Interest rates languish just above 0 per cent, many bond yields are in negative territory, while a number of companies have been forced to cut dividends to preserve cash in the wake of the pandemic.

Renewable energy infrastructure assets, on the other hand, don’t have such problems. They generate an attractive income stream that is reliable and predictable over the long term. 

Most of the costs associated with renewable energy are incurred at the outset to build the solar and wind farms. 

Once the farms are operational (bar some relatively small running costs) they generate income from selling electricity powered by the solar panels or turbines – and do so over several decades. 

It is this long-term visibility of income that has prompted a surge in demand from large investors such as insurance companies and pension funds.

The next growth market in renewable energy 

The cost of wind and solar power continues to fall rapidly, and although they will soon be the cheapest cost forms of power generation, challenges remain. 

Not least that we have sunny breezy days in summer and still dark nights in the winter. 

To bridge that gap, we need to be able to store excess power and change people’s behaviour on when they consume power. 

Storage and automation are key – and the technology is advancing. 

Indeed, it may not be too long before your electric car will automatically charge on a blustery night – and if there’s a shortage of power at other times, your car’s battery will be able to sell power back to the grid.

To complete the meaningful energy transition from fossil fuels to renewables, trillions of pounds of investment is needed. 

Global governments, specialist energy companies and oil majors repositioning away from hydrocarbons can all work together to make this happen. 

Investors too can play their role in tackling climate change by investing some of their savings, such as pension or Isa money, in renewable energy assets. 

And they can do so, safe in the knowledge that their capital is making a tangible and positive impact.