Investments in Triodos Renewables Europe Fund are subject to several risks, which are described in detail in the particulars relating to the sub-fund included in the prospectus of Triodos SICAV II. Some of the relevant risks are highlighted below.
Currency risk is the risk that changes in exchange rates may have a negative impact on the fund’s profits and assets. The reference currency for Triodos Renewables Europe Fund is the euro, whereas investments may be denominated in foreign currencies. Exposure to volatile exchange rates can affect the value of the investments and thus also the fund’s assets. Triodos Renewables Europe Fund is therefore exposed to currency risk. The currency risk is mitigated by restrictions on the relevant exposures. The currency risk related to these investments is partly mitigated by limiting the exposure to any single non-euro currency to a maximum of 20% of the fund’s net assets. As at December 31, 2017, the non-euro currency exposure (British pound) is 8.0% of the fund’s net assets (2016: 3.3%). The increased exposure is a result of a second investment by the fund in the UK. The British pound remained relatively stable in 2017. As at December 31, 2017, the fund has not hedged its currency exposure.
Interest rate risk
Interest rate risk is the risk that unfavourable interest rate changes on the financial markets will have a negative impact on the profit and net asset value of the fund. The performance of the fund is susceptible to interest rates on capital markets. This is due to the valuation method, which calculates the net present value of expected cash flows by incorporating a rolling average market interest rate in its discount factor. In principle, rising interest rates have a negative impact and falling interest rates a positive impact on the valuation of underlying investments. However, the positive impact of decreasing interest rates is capped, as the valuation method is based on a minimum discount rate.
Country risk is the risk that political, fiscal or economic changes have a negative impact on the fund’s profits and assets. Many of the contracts relating to project companies, such as Power Purchase Agreements, subsidy agreements, green and/or renewable energy certificates, carbon offset arrangements, etc., are subject to government regulation and may change over time. Price developments for energy and oil, which differ per country, may influence the Power Purchase Agreements and project revenues. 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. The country risk is partly mitigated by diversification across countries, technologies (see charts in chapter ) and vintages of the portfolio projects. By investing in multiple countries and limiting the exposure to any single country to 40% of the fund’s net assets, the fund reduces its exposure to events and developments in specific countries. In each country, the price of electricity is influenced by the types of power generating assets (e.g. renewables, coal, gas, etc.) and the regulatory environment. Furthermore, the fund may invest up to 10% of its net assets outside Europe. As at December 31, 2017 the Netherlands represented the fund’s largest single-country exposure, accounting for 29.5% of the fund’s net assets. At year-end, the fund did not have investments in any non-European countries. In 2017, the downward trend of the European power price forecast was the main risk in this category. Downward adjustments of the price forecast had a negative impact on the fund’s net assets.
Liquidity risk is the risk that the fund is unable to obtain the financial means necessary to meet its financial obligations at a certain point in time. Triodos Renewables Europe Fund aims to maintain sufficient liquid assets to meet its obligations under normal circumstances. As Triodos Renewables Europe Fund is a semi open-end fund, it may face large redemptions on each valuation day. This could potentially lead to a situation in which the fund needs to temporarily close for redemptions. The following measures can be taken to mitigate the liquidity risk:
- The fund aims to maintain sufficient buffers in the form of cash or cash equivalents or to offer sufficient other guarantees. The cash buffers are determined monthly based on historical inflow and outflow, projections of the inflow and the results of stress tests.
- The investments of the fund are illiquid in nature, but can still be sold on a secondary market.
- The fund may decide to temporarily close for redemptions or subscriptions by suspending or restricting the purchase and issue of shares of the fund.
On December 31, 2017, the fund held 15.5% of its net assets in cash and cash equivalents (2016: 22.7%). Additionally, the fund is allowed to borrow up to 10% of its net assets for short-term liquidity requirements, for which the fund has a EUR 2.5 million stand-by credit facility. Including this stand-by facility, the available cash and cash equivalents add up to 19.1% of the net assets (2016: 24.4%). In 2017, liquidity was considered adequate for the fund to meet its short- and medium-term payment obligations and facilitate weekly subscriptions to and redemptions of its shares.
Triodos Renewables Europe Fund has a very specific, sector-based investment focus on renewable energy. The associated typical risks of this sector will be spread to a limited extent only. The concentration risk is mitigated by applying an investment limit of up to 20% of the fund’s net assets for securities and financing instruments issued by a single entity. The largest single entity exposure as at December 31, 2017 was SolarAccess Energy International BV, representing 10.8% of the fund’s net assets.
The project 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, which depend on the location of each project. In addition, technology risk (e.g. the actual performance of wind turbines and solar panels) can 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 the project level. In order to minimise the project risk, the fund works with experienced counterparties. Before the fund invests in a project, the technical design and the yield estimate are verified by an independent technical advisor. In the operational phase, the fund works with experienced commercial managers who manage and report on the performance of the project. This risk is further mitigated by geographically diversifying the portfolio, by working with multiple developers and by varying the key technology suppliers (turbines, modules, inverters).