A Bright Future for Renewables

In the first of a new series of asset owner interviews, Head of ESG and Sustainability Jan Kaeraa Rasmussen outlines the next steps for PensionDanmark’s broadening green energy portfolio.

Investors in the green energy transition in developed markets have had a tough year. The US has performed a u-turn, with the Inflation Reduction Act’s tax incentives being succeeded by hostility to renewables, especially wind, from the Trump administration. This week, shares in Ørsted slumped in response to $9.4 billion rights issue – prompted by the offshore wind developer’s failure to find a buyer for its stake in a project off the New York coast.

It hasn’t been plain sailing in Europe either. Rising costs have delayed projects across the region. The UK had to hike maximum prices paid to wind farm operators to attract sufficient bids in an upcoming auction to realise its ambitions plan to decarbonise electricity supply by 2030. Meanwhile an outage in Spain left millions powerless, highlighting the challenges for grid operators of balancing demand and supply as low-carbon energy comes on stream.

Should asset owners respond to this turbulence by loosening their embrace of renewable energy – or should they see it as an opportunity? At least one European pension fund is moving further forward, rather than holding back, widening the scope of its investments in green power.

“Investors have to understand that low-carbon solutions will be more competitive with each passing year,” says Jan Kaeraa Rasmussen, Head of ESG and Sustainability at member-owned labour market pension scheme PensionDanmark (€55 billion AUM), which recently expanded its portfolio with an investment in a microgrid fund.

Focus on returns

PensionDanmark has a long and strong track record in investing in the transition to the low-carbon economy. It was among the first pension schemes to have its decarbonisation strategy verified by the Science-based Targets initiative, and in 2021 it set out a target to invest in 800 megawatts (MW) of new renewable energy capacity by 2030.

“The goal is to finance the development and deployment of additional capacity, rather than buying wind farms that are already in operation,” explains Rasmussen. “Through these dedicated investments, we can harvest the development premium and get a higher return.”

With more than 550 MW already in place, Rasmussen expects PensionDanmark to meet its goal early, despite the recent headwinds. He also hopes the example will inspire other asset owners to develop similar strategies in partnership with specialist fund managers that develop renewable energy.

But Rasmussen is a clear-eyed pragmatist focused on the interests of his beneficiaries, rather than a zealot seeking to accelerate the green transition at any cost.

“If we cannot expect to make an attractive risk-adjusted return, we will not enter in an investment,” says Rasmussen, pointing to the fund’s robust track record.

This approach reflects the priorities of PensionDanmark’s 800,000 members, covered by collective agreements between 12 unions and 29 employer organisations. A recent poll of 300 shop stewards placed returns at the top of their priority list, but also demonstrated support for sustainable investment.

Their second priority, unsurprisingly for a labour market scheme, was that investments should have satisfactory working conditions, closely followed by a desire to contribute to the low-carbon transition. This, Rasmussen says, gives the scheme a mandate “to keep on searching for new possibilities to make this transition workable and profitable”.

Portfolio diversification

As announced in May, this includes €100 million to fund the development and operation of microgrids powered by renewable energy. These on-site facilities allow transport firms and heavy industry users to access low-carbon electricity independent of supply from national grids.

The new microgrid investment speaks to Rasmussen’s pragmatic wish to diversify PensionDanmark’s low-carbon energy portfolio, as well as the need for multiple technologies to deliver green energy.

“Many large power consumers want green electricity, which can be difficult to get from the grid. But they can get it from a microgrid at their plants if there are renewable energy sources installed there. Combined with battery storage and artificial intelligence for a secure backup connection to the collective grid, a microgrid solution can provide greener and cheaper electricity than would otherwise be available,” says Rasmussen.

Such investments also reflect ongoing uncertainty about the winners and losers in an energy transition that is still in its early stages, even in developed markets.

“One size doesn’t fit all. We have to have a number of different strategies in our climate solutions portfolio,” says Rasmussen.

“We can see technically that green solutions will not be the same in all countries and markets. But we don’t know which immature green technologies will be most successful in the future. From an investment perspective, it’s good business not to put all your eggs in the same cup, so it’s a diversity strategy as well.”

A broad approach

As a result, PensionDanmark takes a “very broad” approach to its renewable energy portfolio, from investments in flagship funds that develop solar and wind in the developed world to others focused on new technologies like green hydrogen, ‘power to mix’, and pyrolysis. The fund has also allocated funds to advanced bioenergy, both biogas, and newer generations.

Alongside technical suitability, a key factor in the attractiveness of investments in competing low-carbon energy technologies is government policy. As noted above, European countries are still grappling with grid upgrades in order to connect and distribute renewable energy, but policy-level progress has been smooth compared with other technologies.

“The local distribution grid needs to be developed to be smarter,” he says. “Microgrid is a little part of the solution. But politicians need to do more. They know what they have to do, so it’s now much more about pace.

“But when we look at green hydrogen and the infrastructure needed to scale these kinds of solutions, the plans are missing.”

While electricity currently supplies around a fifth of global energy needs – and not all of this powered by renewable sources – the pace of innovation in ‘hard-to-abate’ sectors is expected to drive an expansion in market share.

“Electrification is a very positive story – the possibilities have been demonstrated to be even more exciting than we thought five years ago,” says Rasmussen.

Learning process

As well as investing in new low-carbon power sources, PensionDanmark is positioning itself for the long-term shift toward electricity by engaging with its large equity holdings on their plans to transition from fossil fuel usage.

“Our approach is that we are here to learn,” says Rasmussen, acknowledging that the companies themselves know most about the low-carbon transition in hard-to-abate sectors.

“We have been impressed with some of the leading companies. In cement and steel, for example, electrification has been taken further than I thought [possible] five years ago. Electrical ovens are now performing at temperatures well above 1000 degrees Celsius. That gives new possibilities of transitioning these hard-to-abate sectors,” he adds.

These innovations now mean that most transport sectors – across road, air and sea – now have a sound electrical alternative to traditional fuels, Rasmussen asserts. (On the day of the interview, a successful 400-kilometre battery-powered flight was completed from southern Denmark to Copenhagen.)

According to Rasmussen, investors must look both at and beyond the hard metrics when making assessments of the credibility of firms’ transition plans. “Capex means something, but company culture is also important, as is governance and market strategy,” he says.

Policy action

Both corporates and investors depend heavily on policy leadership to map out their role in the transition to a decarbonised economy. At present, that guidance is decidedly mixed, including in Rasmussen’s backyard where Europe’s pioneering role has been brought into question of late.

The European Commission leadership installed following last year’s elections has emphasised economic competitiveness over environmental commitments. It has expended political capital on a series of ‘omnibus’ packages, including one that scales back sustainability reporting requirements backed by investors.

This has called into question its ability to deliver on net zero pledges, but the commission has also moved forward with its Clean Industrial Deal, which seeks to reconcile decarbonisation and industrial competitiveness by “lowering energy prices, creating high quality jobs and the right conditions for companies to thrive”.

Rasmussen would like to see more support for the renewable energy transition from governments. “Building out our green infrastructure is a government responsibility. Private investors can co-finance it, but the framework has to be public,” he says.

A key part of further policy action should be the phasing out of fossil fuel subsidies. Rasmussen admits this is a major challenge for large countries in the Global South, with complex policy support needed to ensure withdrawal of subsidies does not adversely impact the lowest paid.

“They need to be phased out in a socially acceptable way, and the solution will differ from one country to another. But it is difficult to be an investor in an environment where there are subsidies to the fossil fuel competitors,” he adds.

Brazil beckons

Rasmussen expects the nationally determined contributions due to be unveiled by governments in time for COP30 in November to be a key test of their commitment to climate action. Many have wavered recently, deprioritising or watering down policy measures, whether due to competing economic and national security priorities, or the political rise of the populist right.

The Net Zero Asset Owner Alliance, of which PensionDanmark is a longstanding member, is well positioned to voice investor expectations on the pace and direction of policy change in Belem, Rasmussen says.

Corporates and financial institutions have taken their lead from governments, delaying their net zero targets. As with most large asset owners, Rasmussen is realistic but resolute.

“We cannot exclude that there will be some kind of overshoot within the next decades,” he says. “But the task is exactly the same: to reach net zero as fast as possible. We will reach net zero someday, but it may be a little postponed from what we hoped.”

Brazil is on Rasmussen’s for other reasons, not least the risks and opportunities of financing the renewable energy transition in large developing economies which are at very different stages of the decoupling of economic growth from emissions output. The context is complex, with developed markets having effectively outsourced their emissions via globalisation, and many countries in the Global South, especially in tropical regions, beginning to experience the physical impacts of climate change.

Rasmussen sees the scaling of climate solutions in the Global South as a priority. PensionDanmark has already invested in two dedicated funds focused on scaling renewable energy in in emerging and developing markets and is looking for further opportunities.

“Getting more investments to the Global South is a hard topic, but we are willing to participate in that dialogue and we have money to put behind it.”

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