March 2018
Getting to India’s Renewable Energy Targets: A Business Case for Institutional Investment
3. Aligning institutional investors’ objectives with renewable energy sector investment traits Institutional investors are bound by their fiduciary duties meant to maximize financial returns to their beneficiaries, without taking excessive risks, while also meeting their liabilities over the long-run. In this section, we not only explore a couple of related themes on making renewable energy investments in India attractive to institutional investors (Sections 3.1-3.3), we also provide a summary of different pathways available for renewable energy investments (Section 3.4). We evaluated the match of institutional investor criteria with characteristics of renewable investments based on five objectives (Maginn et al, 2016) pursued by investors: returns, risk, liquidity, time horizons, and regulatory considerations.7 Table 5 and Table 6 provide a matching analysis for domestic pension funds and domestic insurance companies followed by foreign institutional investors in Table 7. A separate analysis is provided for domestic pension funds and domestic insurance companies given significant differences in respective investment criteria.
The renewable energy sector is a long-term and low-medium risk investment. This matches reasonably well with the risk, return, and long investment horizon requirements of institutional investors. Regulations pertaining to securities’ ratings, listing, and liquidity, however, may restrict institutional investors’ investments in renewable energy sector.
We found that the investment requirements of domestic pension funds and insurance companies, which mostly seek yield generating investments in low-risk, long-duration assets align well with the investment profile of renewable energy. However, certain sector specific issues, such as off-taker risk and limited availability of listed securities, restrict the flow of investments. These barriers can be addressed through policy and regulatory interventions as highlighted in Section 4.2. Over time renewable energy investment has also become more suitable to foreign institutional investors as the sector matured from small size, high risk-high return investment to large size, medium risk-moderate return investment. Although the expected returns from renewable energy projects have come down from 20% to 15%, this still matches investors’ overall India market portfolio return requirements.
7
We have excluded other two objectives like unique circumstances of particular investors and tax concerns from our analysis. Pension and insurance funds are usually exempted from taxation on investment income and realized capital gains, while unique circumstances depend on the specific status of investors.
A CPI Report
15
