In the beginning of June, Norway’s $900 billion Government Pension Fund Global (GPFG) officially announced divestment from companies that base 30% or more of their business on coal. This pivot will move about $9-10 billion out of 122 companies globally. As an early mover, the GPFG divestment  marks a  much larger redirection of institutional capital – which totals over $70 trillion globally – away from outdated energy infrastructure, presenting a massive opportunity for investment into a distributed energy future.

 

While the Norwegian government has voiced concern over the environmental impact of coal, the decision to divest the fund – which is derived from oil and gas revenue – was also driven by an assessment of financial risk. The 2015 Energy Information Administration (EIA) Annual Energy Outlook notes that in the U.S., even as 60 GWs of coal generated power are project to go offline by 2020, in all projected scenarios, investment into new coal based power generation through 2040 is negligible to non-existent. The clear trend is that natural gas and renewable energy have been gaining economic advantage and eating coal’s share of the energy mix.

 

Divestment means investment elsewhere. If divestment is an early signal of a larger redirection of capital, the potential for investment into alternative energy infrastructure could be significant. The broader pool of capital managed by institutional investors is over $70 trillion globally. In a US and European market defined by historically low bond-yeilds, the long-term stable returns provided by alternative energy infrastructure looks increasingly attractive. For many sovereign wealth funds particularly, renewable energy infrastructure can be especially attractive as it serves as a natural hedge against the volatility of fossil fuel prices, which are often the original source of revenue for the fund itself.

 

One of the most interesting aspects of the GPFG divesment is that a significant portion of the companies that are going to be hit are also some of the worlds largest investors into renewable energy. Many of these companies see the writing on the wall, and are preparing for transition. E.ON, the major German utility, for example, is undergoing a restructuring in order to separate their fossil fuel oriented business from their distributed energy business. Divestment, and systematic re-investment, could move a lot of other companies over the fence.

 

That being said, there are still obstacles directing these deep sources of capital toward alternative energy infrastructure. Given the large sums of money that need to be mobilized, the vehicles for investment need to be robust, scaleable and deliver appropriate risk adjusted returns. The challenge is only enhanced by the smaller deal sizes, and therefore increased transactional friction, that characterizes distributed energy.

 

Institutional investors, therefore, need new and more attractive mechanisms to participate. Vehicles like securitization and YieldCos are promising, particularly because they offer liquidity, but they have relatively short histories in delivering adequate risk adjusted returns. Accelerating capital flow into these vehicles requires the industry to quickly build a history and data infrastructure that can improve the profile of investment into newer technologies.

 

Ultimately, it is up to the energy industry to deliver attractive financing vehicles that can access institutional capital. Divestment presents a tremendous opportunity for a corresponding re-direction of investment but it also requires energy companies to to mature rapidly and deliver more information in order to reduce the risk associated with new technologies.