Institutional investors have a very great potential in energy project financing and could meet – under particularly good circumstances with no policy barriers – 24 percent of project finance equity needs and 49 percent of project finance debt needs (in OECD countries renewable energy targets). The new regulatory framework combined with the stretched balance sheets which renewable energy developers must face, makes the involvement of institutional investors in project finance very suitable and recommended. They should act in a counter-cyclical manner, seeking new investment opportunities and continuing to invest in riskier assets such as those in the energy sector. Among institutional investors, the potential for insurance companies is higher, considering that their assets are highly invested in corporate debt securities, whereas pension funds maintain currently large allocations to corporate, publicly traded equity. Nevertheless, institutional investors’ direct asset allocations to green investments in the OECD countries remain low. This could also be explained by new regulations (Solvency II and Basel III) which reduces the insurance business attractiveness to banks by reducing their capacity to issue long term-term project finance loans. Regulatory framework is central to attract institutional investments and regulatory changes may prompt insurance companies to rethink their capital allocation. In developing countries, insurance companies and pension funds are even less inclined to direct their funding to long term investments with variable returns into the future, such as energy projects. This is mainly due to the higher risks perceived and the expectation of average higher Internal Rate of Return (IRR) than in OECD economies. Hence, in developing countries Sovereign Wealth Funds (SWFs) have the higher potential, despite potential growth in emerging markets is becoming a market driver for European insurers that would like to redeploy their capital.

Roundtable discussion:

Carlo Carraro, Chair; FEEM Scientific Director


This Policy Session has been jointly organized by FEEM and ICCG.