While the interest in renewable energy infrastructure investments is at an all-time high in Europe and the US, seasoned emerging market investors increasingly find that emerging markets present attractive risk/return and diversification characteristics. Shawn Westcott, Business Development and Investor Relations for Triodos Investment Management (Triodos IM) in the Nordics, shared his thoughts about this opportunity in the light of his firm’s long-standing foothold in this particular area.
“Europe still presents highly attractive opportunities when it comes to renewable energy,” Westcott starts. “In some of our renewable-energy focused products, including our ‘green’ fund dedicated to Dutch investors, we have also carved out some space for emerging markets exposure, and we have noticed a significant increase in interest for the space.”
Westcott mentions several aspects that justify this enthusiasm. “Emerging markets are currently experiencing a large increase in demand for energy. Massive population growth and economic growth is leading to this increase for electricity demand. There is an opportunity to leapfrog the old fossil-based technology in a way similar to what happened with Telecom. Having these fast-growing countries adopt renewable energy straight away without building fossil fuel-based plants represents a tremendous opportunity, both financially but also, of course, environmentally,” Westcott continues.
“From the very beginning, one of Triodos IM’s goals has been to invest where we can play a catalytic role. In other words, we want to open up investment opportunities in areas that are not very well known by other investors and attract capital at scale. Renewable energy in emerging markets is a good example,” Westcott says. “These investments provide competitive risk-adjusted returns while participating in the democratization of energy access and avoiding an increase in harmful emissions. Facilitating the acceleration of capital flows towards such win-win opportunities is what we target. That’s how we fulfil our catalytic role while also providing an attractive investment opportunity to investors.”
Triodos Bank, the investment management firm’s parent company, an ethical bank founded in 1980 to finance companies that benefit people and the environment, has built strong ties with a range of public and private partners, including development finance institutes (DFIs). Leveraging these relationships and the significant investment network the parent bank has achieved over the last 40 years, Triodos IM has access to a reliable flow of investment opportunities in emerging markets. “DFIs such as as the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank are valuable partners when it comes to securing high-quality deals, not only because they sometimes take the first-loss tranche, thereby reducing the risk for the senior debt tranche we invest in, but also thanks to their undeniable on-the-ground expertise. We also often invest alongside private investors on the impact side. We’ve noticed a slow but steady growth in this network recently as the appetite grows from outside the typical impact space,” Westcott adds.
One of the typical objections to emerging market investments from prudent western investors is the high perceived level of risk. For Westcott, this is, more often than not, a simple misconception. “Of course, there is an inherent risk in all investments. The question is: can you effectively manage that risk?” he continues. “One of the biggest challenges we have experienced tied explicitly to emerging markets is timing. Project timelines tend to be longer there than in developed markets. We know about this issue, and it is therefore already factored into our investment plan. This risk is manageable. There is also sometimes political risk, which is inherent to emerging markets, and it is less predictable. However, investors who have no ‘boots on the ground’ tend to overestimate the importance of this risk. We have been operating in emerging markets since the 1990s and are very comfortable managing these risks. With regards to the investments, data on senior emerging market debt doesn’t show a significantly higher credit risk for project financing in emerging market compared to other regions.”
The majority of the investments Triodos IM manages in EM renewable energy is senior debt. “This is well-structured capital,” Westcott explains. “While we aim to have a catalytic role, we are still looking for good investable deals with good fundamentals. The majority of our deals are senior debt, which are not particularly high risk. Some of the investments we make are in equity, but this tends to be via select funds targeting technology related to renewable energy. The overall portfolio exhibits low risk and low correlation.”
Nordic investors, in particular, tend to be well acquainted with opportunities in emerging markets. Microfinance is a well-accepted and well-known sub-asset class within emerging market debt, which Nordic institutional investors are already familiar with. “It would be surprising if they weren’t keen in EM renewable energy-related debt,” Westcott comments. “In general, renewable energy is a fast-growing area in these institutions’ portfolios and adding a low-correlated product to the mix, with enhanced returns compared to microfinance, is likely to generate interest,” he concludes.
Picture courtesy of Shawn Westcott