Practical Applications of Portfolio Construction and New Energy Infrastructure Investing

Abstract

In Portfolio Construction and New Energy Infrastructure Investing, from the Winter 2021 issue of The Journal of Impact and ESG Investing, authors Christian Andersson, Christian Broberg, Kerim Kaskal, and Martin Sonesson (all of Worthwhile Capital Partners) argue for diversifying away from traditional assets and into renewable-energy infrastructure. Historically high stock price-to-earnings ratios (P/Es) and low bond yields, plus increasing correlation between stock and bond performance, make it unlikely that traditional assets will provide the risk-adjusted returns life insurers and pension funds need to cover long-term liabilities.

The authors demonstrate that renewable energy generation is newly ready for investment at scale and has political tailwinds behind it. Wind and solar power have become so efficient that they operate at lower costs than coal-fired power plants, and governments worldwide are funding conversion of energy grids to renewable power. It is time to reallocate assets into renewable-energy infrastructure, but investors must carefully manage risks specific to this sector. This requires diversifying across three renewable-energy asset subclasses—generation, flexibility, and connectivity—whose revenue streams can vary and do not correlate with one another. By reallocating to a carefully constructed renewable-energy portfolio, institutional investors can diversify their holdings and improve risk-adjusted returns.