Pension fund: EU should promote ‘one-stop shop’ for housing renovation

The average investor only has 1% into alternative investments, like renewables or energy efficiency. [Aapo Haapanen / Flickr]

This article is part of our special report Back to front: Struggle to renovate EU building stock persists.

Homeowners typically don’t have the capital to invest in energy renovation solutions, despite the proven returns. Danish pension fund PKA helps bridge that gap with a one-stop-shop solution which, it believes, could be replicated across Europe.

Pelle Pedersen is head of responsible investment at PKA, a Danish pension fund. He spoke to’s publisher and editor, Frédéric Simon.

Why is a pension fund like PKA interested in energy efficiency?

There’s a number of factors. First, we represent the healthcare sector, nurses and social workers and 90% of our members are women. And our members believe we should pursue investments where we are able to merge sustainability and profit. Because of that, we have in our investment strategy a specific reference to climate change and to what we call impact investing.

That’s not to say it’s easy to find a project where you can combine the two. We started in 2011 with our first wind park investment in Denmark, which was the biggest in the country at the time. Now we have invested roughly €1.7 billion into four wind parks.

We’ve also created our own energy renovation fund where we provide fully funded energy renovations to homeowners and companies in Denmark. We’re repaid through savings on energy bills, plus interest on the loans we provide.

This got a lot of attention in Denmark, from mayors and politicians all over. PKA provides the capital but we’re very honest about how knowledgeable we are about building renovation, which is a specific area of expertise. So we’ve teamed up with another organisation, Smith Innovation, and they are the experts in providing the needed solutions together with the essential financing, which makes our offer much more effective.

On our side, we bring capital to the table. We invested €40 million into this fund called Sustain Solutions, offering fully funded renovation in Denmark, and we hope to see further allocations being made to that fund as we go along.

When the fund was launched back in 2015, we had to explain what this was all about, why we believed this was very innovative. Now, we’re exploring how we could collaborate with other Danish companies to provide a one-stop package to homeowners so they don’t have to engage with ten different contractors and ten different companies for specific solutions.

You said it wasn’t always easy to find projects that combine financial returns with environmental benefits. So what, typically, were the kinds of projects you refused and those you accepted?

What we’re looking for – as all investors do – is a stable political environment. And we’ve seen a few cases, in Spain and the Czech Republic, where legislation on renewables was changed retroactively and investors suffered a loss. This led some investors in Europe to take a step back and say, ‘Well, maybe we shouldn’t be investing in renewables’.

Do you have similar concerns about retroactive changes made to legislation in the energy efficiency field?

We actually don’t because we’re not that dependent on subsidies when it comes to energy efficiency. It pays its own way much more. Other investments such as wind parks or similar are of course today much more dependent on subsidies to attract private capital.

But when we look at our energy efficiency investments, actual energy savings usually range between 30-60%. So the business case is there no matter what. Of course, it’s beneficial for the project that we have some levels of subsidies, but it’s not the main reason to invest. And the payback period for these loans tends to be five years depending on whether you decide to install solar, which will extend the payback period.

If the payback is good, have you decided to invest more money in that area as a result?

On a general basis, the main problem is that homeowners don’t have the capital to invest in energy renovation solutions. So that was a real problem for the companies providing these solutions in Denmark. With our capital, we can actually bridge that gap.

But we haven’t really seen these types of solutions move at scale and that’s what we’re trying to do now. Of course, we’re looking at Denmark, but down the road, we could potentially consider broadening the scope to also include the rest of Europe.

Essentially, you need these one-stop shop solutions. We all know engaging with several contractors can be a huge challenge. And we truly believe in our solution, which makes the entire process a lot easier to understand.

So you think every country should have a one-stop shop in place for energy renovation. Should this be guided by EU-level legislation or can it happen at national level only?

Both are needed, clearly. What we need is higher ambition in EU legislation, which is then translated into appropriate levels of ambition at national level as well. That’s exactly what happened with the 2020 legislation and that’s what we’re campaigning for looking ahead to 2030.

Now, the actual hubs or platforms – this is something the Commission is planning for as part of the smart finance for smart buildings initiative. They’re talking about national platforms where money can meet projects and where there can be technical assistance provided.

But this can also work on a multilayered approach. For example what PKA is doing in Denmark with our partner organisation is a very concrete case of capital meeting technical expertise, so it doesn’t have to all be done through national platforms, which would be set up by member states with the assistance of the EIB and the Commission. That’s just one way of doing it, but there has to be room for initiative.

If there were one-stop shops across every EU member country, that would be an incentive for PKA to expand its activities? 

Exactly. With a stable framework, it makes sense for us to consider scaling our investment in energy efficiency to other European countries. However, we need the right partners with the essential know-how before this can be an option. But ambition with strong political backing is crucial. That’s also why we are focussing on Denmark at the moment. That’s our home country, we trust the regulation.

Again, we need the EU to deliver, at least on its current ambitions. To be frank, on our side we would prefer less bureaucracy. If we had to engage with the EU every time for each specific project, it would be too much. This is not to say the EU should not play a role. Public-private-partnerships could be the game changer we all need. However, as investors, we do not always have the time for policymakers to catch up.

Accessible capital is, fortunately, today not the main barrier for mobilising private investment. And when it comes to energy efficiency, a major barrier is the actual understanding of the risk, which is a key consideration for institutional investors.

Institutional investors always base their investment on a risk/return-adjusted ratio, so we always compare the return with the risk. Of course, there’s no return without a risk, but the risk is drastically reduced if you have the know-how to measure the cash flows you will be receiving in the investment period.

So it is really essential to build some sort of database to highlight the actual risk against the perceived risk with energy efficiency investments, which can be a key driver to mobilise more private capital.

How do you overcome that? What makes you invest in energy efficiency despite the lower evidence for quick returns?

Generally speaking, we need more research on the actual risk to attract more private capital. This is something the European Commission is doing – they’re building up a database of energy efficiency projects across Europe and they’ve got a staggering number, around 12,000 individual cases.

For a pension fund or a bank, this is exactly the breadth of data you need to analyse to decide whether energy efficiency is worth putting your money into.

Across Europe, you see that more and more banks are either proposing very low-interest rates for green mortgages or lowering them to renovate your home. Here in Belgium, ING offers 1.95% on up to €50,000 over ten years to renovate your home, which is extremely competitive. In Bulgaria, Pro Credit, a German bank, is offering very low loans as well. It’s the same in the Netherlands.

So we’re seeing that more and more banks are seeing the opportunity and are beginning to act as advertisers for energy efficiency. And when a bank sees an opportunity to make money with energy efficiency and starts campaigning for it, then we’re really starting to get the sort of critical mass we need.

PKA currently operates in Denmark. Where would you go to next?

There’s a lot of opportunity still in Denmark, which is where our main focus today is. But just look at the potential in the UK when it comes to insulation, district heating and similar. Billions are needed and we need all the relevant stakeholders to be a part of the solutions.

The same goes for the Baltic countries. And Poland as well, where the air quality issue can be a key driver. When you look at the causes of air pollution, you see that 40% of Polish homes have no insulation whatsoever. And a large number of Polish homes are using coal for heating and it’s very low-quality coal, it’s waste coal which cannot be burned to produce electricity.

So the health factor there is a huge issue and what we’re seeing is that more and more energy efficiency is just fitting into these bigger human and social logics. Energy efficiency is not the standout issue but it’s becoming recognised as the solution for much bigger issues.

Where next? Central and Eastern Europe?

If you just look at the existing building stock in Europe, it’s estimated that between 75 and 90% will still be up and running by 2050, so there’s tremendous potential, even in Denmark.

Policymakers keep asking pension funds to invest in Europe – whether in renewables, energy efficiency, roads, or infrastructure in general. But at the same time, many financial regulators at the national level are very cautious about alternative investments – in Denmark and in many other European countries. So if the financiers nationally are not able to actually support those kinds of investments, then we’ll never succeed.

At PKA, we’ve invested roughly 25% in alternatives, but the average investor only has 1% in alternative investments because a smaller pension fund might not have the resources to set up a 20-man team as we did. At the same time, if the regulators question alternative investments such as renewables and energy efficiency, then where is the incentive to do so? That is also why a greater focus on actual risk, against perceived risk, is essential.

Since you’re investing so much in alternatives, you must have lots of data. Are you making that data available to others in the financial sector?

We can make the case to invest in alternatives. A few weeks ago, we sold one of our wind parks and made a return of €150 million over three years. Therefore, it can make sense for pension funds under the right circumstances to invest in alternatives combining the green agenda with our responsibility to provide our members with the best possible pensions.

That’s also why we’re here in the EU explaining that to policymakers, explaining that there are billions on the table.

Are they listening?

They are listening, they’re very interested. One of the main messages we’re trying to get across is that it’s not just an issue of money – it’s really a matter of know-how.

Sometimes even large cities find it very hard to engage with EU institutions. You need intermediaries, people who understand how to finance projects and how to help project developers put together applications to get the financing. Because not every pension fund has the initiative or resources like PKA to team up with local organisations that have this know-how. This is something that the Commission and member states can do a lot to help with – put the capital in touch with the projects.

Just look at our wind parks. All of them were developed with Dong Energy. When you have the model, when you have the company in charge of the contract, of getting all the permits, actually building and operating the wind park, the only thing we have to do is to provide the capital.

That’s the type of solution we need if we are to scale investments in energy efficiency.

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