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Retrospective policy changes dampen appetite for low carbon investments

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Institutional investor appetite for low carbon investment opportunities is being significantly dampened due to retrospective policy changes at member state level.

This is the key finding of research conducted by Norton Rose on behalf of the Institutional Investors Group on Climate Change to ascertain the effectiveness of the EU’s policy framework in attracting private sector investment to achieve its climate goals.

According to the research, published in the IIGCC paper Shifting Private Capital to Low Carbon Investment: An IIGCC position paper on EU climate and energy policy, 90 per cent of asset managers interviewed said that changing policy and retrospective policy making in the absence of guarantees for grandfathering of existing investments is a barrier to investment in renewable energy.

Other barriers to investment included permitting and planning problems (55 per cent) and grid access and grid infrastructure issues (45 per cent).

Ole Beier Srensen, chairman of IIGCC, says: “Investments in renewable energy projects are very long-term and generally only possible if assisted by policies that support a relatively safe long-term assessment of expected risks and returns. Where the credibility of support mechanisms for existing investments is called into question, future private investment in renewable energy and other climate relevant activities will be severely curtailed or there will be the risk that the price of raising capital for these investments will increase. ”

In terms of specific investment products, the research found that the EU ETS has not yet provided investors with the strong, long-term price signals that are necessary to commit to long-term low-carbon investments at scale. Less than ten per cent of respondents said that the EU ETS has provided a strong enough price incentive to switch from carbon-intensive to less carbon-intensive investments. In addition, not one respondent felt that the EU ETS had provided long-term price signal certainty.
 
Despite this negative outlook however, 63 per cent of respondents said that setting caps lower and sending the carbon price higher was among the measures that would incentivise low carbon investments, while 50 per cent of respondents saw a long-term and detailed roadmap out to 2030, even in the absence of international action, as one of the most important drivers for incentivising a shift in investment sentiment.

The research also highlighted that the apparent deadlock on whether or not to move to a more ambitious short-term emission reduction target, for example to 30 per cent by 2020, was causing uncertainty amongst investors. While such a target is likely to lead to a higher carbon price as well as stronger incentives for investment, the survey found that most respondents were unable to articulate how they expect a move to a 30 per cent target would affect their business or the market generally.

David Russell, co-head of responsible investment at USS, says: “The current uncertainty surrounding the emission reduction target, including potentially raising the target, is hindering the predictability of carbon prices and therefore investment decision-making across assets affected by climate policy. Whilst a unilateral move by the EU to a more ambitious short-term emission reduction target would have positive implications for the carbon price and stronger incentives for companies and investors to shift into less carbon intensive investments, it is essential that there is a better understanding of the implication of such a move before the decision is taken.”

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