Investments in Triodos Renewables Europe Fund are subject to several risks, which are described in detail in the fund prospectus. Some of the risks are highlighted below.
A long-term risk is constituted by the fact that the amount of electricity produced is determined by various uncertain factors, such as wind speed, rainfall and sunlight. Added to that, there is a technology risk (e.g. actual performance of turbines and solar panels) that could affect the amount of electricity produced. Where the fund invests in projects that are not yet operational, it is also exposed to a construction risk at project level. The performance of the project also depends on the quality of the plant management. This risk is mitigated by working with experienced developers and by using knowledgeable advisors to determine the expected electricity production and plant performance.
Another risk is the potential volatility in income from the electricity that is produced. In cases where a project is partly or entirely dependent on market electricity prices and is not fully eligible for fixed feed-in tariffs and subsidies, the expected income and valuation of projects could fluctuate along with changes in market electricity prices. This risk is partly mitigated by diversification across regions and technologies.
Regulatory risk / Country risk
There is a risk with regard to the stability of expected income when national feed-in tariffs and subsidies apply. Generally speaking, subsidy schemes may be curtailed faster than market prices for installations, which could temporarily restrict new investment opportunities with an acceptable return. The value of the investments may also be affected by other uncertainties in the form of abrupt changes in domestic tax policies and other legislation and regulations. Triodos Renewables Europe Fund mitigates regulatory risks by means of geographical and technological diversification.
Interest rate risk
The performance of Triodos Renewables Europe Fund is susceptible to capital market interest rates. This is due to the valuation method, which involves calculating the net present value of expected cash flows, using a discount factor that incorporates the one-year rolling average market interest rate. In principle, rising interest rates will have a negative impact and falling interest rates will have a positive impact on the valuation of underlying investments. The positive impact of decreasing interest rates is capped, however, as the valuation method incorporates a minimum discount rate.
Triodos Renewables Europe Fund invests in assets that are not listed on a stock exchange and that are relatively illiquid. In view of the fund’s open-end structure (enabling subscription and redemption of shares on a weekly basis) this could potentially lead to a situation in which the fund needs to temporarily close for redemptions. There is also a risk that the fund may be unable to obtain sufficient liquidity to fulfil its financial obligations. This risk is mitigated by keeping a sufficient percentage of its assets in cash or cash equivalents. Additionally, the fund is allowed to borrow up to 20% of its net assets.
The fund aims to diversify its assets across regulatory regimes, different forms of technology and macro-economic factors that vary in terms of their impact on energy prices and the long-term value of assets. The fund does not apply a hedging policy, as its long-term strategy implies that currencies do not impact the valuation of the portfolio. In the short term, however, currency fluctuations can have an impact on the value of the fund’s portfolio.