Mid-year review: There’s been a ‘systemic shift’ of LP capital to impact, says NextEnergy’s Swords

Shane Swords, managing director and global head of investor relations at NextEnergy Capital, shares his thoughts on the state of the impact investing market as part of our Q&A series with leading impact firms.

How would you characterise the fundraising market in H1 2023?

Despite the numerous challenges currently facing the fundraising environment, including the widely mentioned denominator effect, NextEnergy Capital continues to experience good traction with investors across the globe. We recently held a successful first close for NextPower V ESG, our OECD solar and energy transition strategy raising $480 million (including $150 million of co-investment capital) in July, and a third close of our UK strategy, NextPower UK ESG, bringing commitments to almost 20 percent above target at £595 million in Q1.

We currently have investors undertaking detailed due diligence on both funds and we have further closes scheduled for later in the year. We remain encouraged by the interest shown by investors, particularly towards the value they derive from our specialist approach, which provides access to high-quality projects across the entire solar PV value chain. It is also clear that there has been a systemic shift toward impact-focused funds that offer an attractive double digit sustainable return, such as the Article 9 ESG funds we offer.

Has the political backlash against ESG affected your business? How do you feel about it?

NextEnergy Capital certainly understands and is keenly aware that political lines have been drawn around ESG and more specifically, our focus within the renewables segment. However, we don’t believe this has had an effect on our business. We remain steadfast in our belief and our mission to generate a more sustainable future by leading the transition to clean energy.

NextEnergy Capital seeks to address these global challenges because we recognise that our role in society goes well beyond access to clean energy. We actively participate in the global effort to reduce carbon emissions through the development, operation and financing of renewable energy infrastructure assets. One of our fundamental beliefs is that the combination of these objectives will accelerate the global deployment of renewable energy power generation, leading to incremental environmental benefits and long-term economic competitiveness.

The impact investing market is scaling up and going mainstream; how is this affecting your business?

NextEnergy Capital has been a solar specialist in the solar industry for over 16 years, with a mission to contribute to a more sustainable future by leading the transition to clean energy generation. Our values and mission have remained the same since inception. We are now a global manager with both an employee and asset presence in nine countries. We have always positioned ourselves to generate positive, measurable environmental impact alongside a financial return, and we are the forefront of this today, as impact investing develops into the mainstream market.

NextEnergy Capital continues to lead the market from an ESG, sustainability and biodiversity perspective. We focus on additionality and recognise that adding new renewable energy capacity globally has a crucial role to play in the world’s future energy needs. Our Funds are Article 9 impact Funds under the EU SFDR, which means that they have sustainability as a core investment objective.

Which impact themes, sectors or strategies do you see as being most exciting and untapped?

NextEnergy Capital sees sustainable investing as key in the current market and we firmly believe that solar PV continues to present an exciting opportunity for investors seeking double digit financial returns whilst making a positive impact. Solar PV is the cheapest form of electricity in the world and is due to become the largest globally by 2027. It is therefore a proven, stable, and low-cost form of renewable energy and presents long-term stable cash flows for investors. Solar technology advancements also enable specialist solar investors like NextEnergy Capital that have presence throughout the value chain to continue to remain ahead of the market and increase renewable energy production using our in-house expertise.

We also see battery storage as an exciting opportunity, particularly because storage is additive to solar portfolios and improves the reliability of renewable energy overall. The cost of storage has come down significantly in recent years and NextEnergy Capital has seen the economic and environmental benefits of adding this to the funds in our existing portfolio.

Such investments also provide the opportunity to improve biodiversity as a byproduct, which we consider extensively throughout our investment processes. Many sites in our listed vehicle’s portfolio are strong examples of this, with enhanced biodiversity measures implemented across 45 percent of the entire portfolio.

Which impact themes, sectors or strategies do you plan to avoid because they are over-capitalised?

Brownfield solar is a saturated market where returns have compressed. Our strategies focus on the additionality of greenfield assets, where new-build solar generates higher returns for our investors while also addressing the climate issue. We also choose not to invest in oversaturated markets; instead, our investment teams analyse the best market opportunities in the strategic geographies as set out by each fund’s terms.

NextEnergy Capital does not focus on multi-technology funds as we believe that our value comes from being a specialist manager. We provide diversification from revenue, technology, geography and size of individual asset perspectives, which enables us to generate higher returns.

Do you use benchmarks to evaluate your impact and why (or why not)?

We evaluate our ESG impact in a number of ways, through extensive reporting on both a fund level as well as a company level. Included in the firm-level reporting is an annual SDG report which measures our alignment and contribution against several UN Sustainable Development Goals. The transparency of measurables through reports such as this helps to contextualise the impact that our investment strategies have on a global scale, and demonstrates that our ESG impact is material. In a time where greenwashing is a prevalent issue, it is important to us that we ensure our ESG reporting is thorough and in-depth, to reaffirm our company mission that generating clean energy for a more sustainable future is our key aim.

Moreover, NextEnergy Capital applies a number of voluntary reporting methods to enhance our transparency including, for example, PRI reporting and GRESB (Global Real Estate Sustainability Benchmark).

How will the development of generative AI affect your business? Are you using or planning to use it?

NextEnergy Capital expects that AI will form a more prominent role in the renewables space in coming years. Currently, NextEnergy Capital uses AI across a few elements in the solar value chain, most notably from an asset-monitoring perspective. For example, we use drone technology to monitor solar assets remotely, which helps reduce travel costs and gives the team more accurate insight of the operations of each particular asset. It also decreases the likelihood of health and safety issues.