Accelerating the green energy transition

Over the past few years, the global economy has been slowly switching power sources, pivoting away from greenhouse-gas-emitting fossil fuels towards cleaner and renewable alternatives.  This transition to clean energy was always meant to cost trillions of dollars and many decades to complete.  However, the recent win from President-elect Joe Biden should provide for a further boost to the renewable and alternative energy industry at the expense of traditional oil and gas industry. 

In a vivid illustration of changing fortunes in the energy sector, this year we have seen a huge discrepancy in performance between the so-called ‘green’ plays and traditional oil and gas stocks.  This is demonstrated by the performance of the iShares S&P Global Clean Energy ETF which is up over 100 per cent year-to-date and hitting highs not seen since 2010.  At the same time, the Energy Select Sector Fund, which has over 45 per cent of its portfolio invested in the stocks of Chevron and Exxon Mobil, has fallen by over a third in 2020.

Biden wants to transition the US from an economy reliant on fossil fuels to one driven by wind, solar and other renewable energy sources.  Biden has pledged to tie the US economic recovery to tackling climate change in a significant policy shift from Trump’s easing of regulations on fossil fuels. His plan includes a $2 trillion package in climate-related and infrastructure investments over four years in pursuit of a carbon-free power sector by 2035 and a net-zero economy by 2050. He has also vowed to rejoin the Paris climate accord that Trump exited.

Even without Biden’s win, investors have been positioning for governments worldwide to enact more climate-friendly legislation.  The UK, for instance, announced last month that it would ban the sale of new petrol and diesel cars and vans from 2030 to cut carbon emissions.   At the same time, the EU has committed to spend around a third of its €750 billion recovery fund on addressing climate concerns.

Another reason why renewable energy stocks are outperforming right now is that the renewable energy industry is growing at a rapid pace.  As a result of the increasing focus on climate change and sustainability, demand for renewable solutions is sky-high. Today, renewable energy sources make up around a quarter of the world’s electricity.  However, the International Energy Agency (IEA) sees renewable energy generating capacity growing to around 30 per cent by 2024 under its base-case scenario, driven by cost reductions and advances in digital technologies. 

A third reason why renewable energy stocks are surging higher is that interest in sustainable investing, or socially responsible investing (SRI), is growing exponentially at present.  In the US, $20.9 billion flowed into sustainable funds in the first half of 2020, according to Morningstar.  That was just short of the total 2019 sustainable inflows of $21.4 billion.  It was a similar story in Europe, with European sustainable funds attracting record inflows of €54.6 billion in the second quarter of 2020.  That was more than double the inflows registered in the first quarter of the year.

For investors, the renewable energy sector represents a compelling long-term opportunity.  In all likelihood, the transition to renewable energy is likely to be a focus for government for decades.  In terms of renewable energy stocks, there is no shortage of options for investors. 

Among more household names, shares of Enel have significantly outperformed the overall European market this year, as the shares surged by around 20 per cent year-to-date.  On the other side of the Atlantic, one of the most prominent names in the renewable energy sector is NextEra Energy, which last month briefly overtook US oil majors Exxon Mobil and Chevron in market capitalisation after a rise of over two per cent in its shares since January. 

It is important to understand, however, that not all companies are likely to capture the full opportunity. As with any other emerging industry, some companies will be winners, while others will be left behind.  Some technologies will simply not prove to be commercially viable. It is also worth pointing out that renewable energy stocks may be highly volatile, with huge price swings occurring in a short period of time.

What all this means is that the best way to gain exposure to the renewable energy theme is to invest in a diversified portfolio of stocks which is normally captured through a managed mutual fund or a passive exchange traded fund in order to spread the risk. By investing in a basket of renewable energy stocks, an investor could potentially capitalise on the upside that the theme offers, while minimising the downside risk.

As things turned out, COVID-19 and the new presidency in the US should provide a signficant boost to the green energy transition globally. At this stage, it is difficult to foresee a future with these trends reversing and investors should look for opportunties in this space. What was once a niche area of finance, sustainable investing is fast becoming a mainstream investment strategy.

Source : TIMES Malta

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