Clean tech perfect fit for pension funds

LONDON (Reuters) - Clean technology investments should be a natural fit for pension funds who could help plug an estimated 500 billion euro renewable energy funding gap in Europe, KBC Asset Management told Reuters.

Governments are trying to convince large pension funds to move capital into the sector as utilities do not have enough financial capacity to meet all the costs of replacing old power plants and investing in cleaner technology.

Investment players estimate that British pension funds have 1.5 trillion pounds in assets and could invest about 80 billion of that in green projects and private equity.

"Pension funds are being very selective about the long-term strategies they set but these investments are a natural fit," said Steve Falci, vice president of sustainable investment at Dublin-based KBC Asset Management (KBCAM).

"Pension funds are the ultimate investor with a long-term horizon and we know they are searching for new sources of alpha (risk)."

The renewable energy sector has been volatile over the past year, after U.N. climate talks failed to seal a legally binding climate pact, U.S. climate legislation delays, tighter project financing, sovereign debt worries and subsidy cuts.

Over the long-term, countries are still committed to renewable energy targets and technology costs should fall, spurring more investment, Falci said.

"We are seeing more and more interest from pension funds who recognise that sustainability is a potential return driver over the long run. I am very optimistic that more and more pension funds will come to these types of investments."

Britain's coalition government plans a green investment bank which may sell government-backed bonds to raise upfront capital.

Floating green bonds to raise capital could attract pension funds, Falci said.

"This could be a way for large pension funds to get exposure to sustainability in fixed income portfolios in a risk appropriate way."

SECTOR PICKS

KBCAM has 1.4 billion euros of assets under management in the evironmental sector which include water, alternative energy, energy efficiency and agriculture investments.

This week, Belgian holding company RHJ International (RHJI.BR) agreed to buy KBCAM from Belgian banking and insurance group KBC (KBC.BR).

Falci's top picks for investment are water infrastructure, wind power and energy efficiency.

KBCAM's Water Fund outperformed the global benchmark MSCI World Equity Index .WORLD by one percent in the first quarter and has outperformed for eight out of the nine years the fund has existed, Falci said.

This consistent performance, together with more water demand and faster urbanisation makes the sector attractive.

Although KBC's Alternative Energy Fund underperformed the index due to the market's volatility overall last year, Falci says wind power will undoubtedly be a long-term solution.

"Wind is already at grid parity and we think the costs of solar are moving in the right direction. As we see those costs reducing, the investment opportunities will increase."

KBCAM would avoid investing in any lower-quality, more speculative company which still might have financing issues over the next 6 to 12 months, Falci added.

(Reporting by Nina Chestney; Editing by Keiron Henderson)