Clean energy – an investment ‘megatrend’

James McManus


4 min read

We recently invested in clean energy equities as a thematic addition to our managed portfolios. Thematic investments seek to capture long-term, transformative forces that are changing the world we live in, driving innovation and redefining business models – collectively referred to as megatrends. Climate change and resource scarcity is one such megatrend, where the demand for a more sustainable tomorrow is driving a shift to cleaner forms of energy provision. 

wind

So, what are clean energy stocks?  

The clean energy theme provides exposure to companies that produce energy from solar, wind and other renewable sources. It is comprised of industrials, information technology, utilities and energy equities from companies involved in clean energy provision and technological development.  

What makes clean energy attractive? 

There are a number of longterm structural drivers that make clean energy attractive. A major force has been the policyled transition to carbon alternatives for energyThis demand in advance clean energy tech and utilities comes as estimates predict 50% of the world’s energy will come from solar and wind by 2050. The International Energy Institute forecasts sustainable development led major shift from increasingly redundant traditional utilities to renewables, which will account for 80% of global electricity by 2040.  

The recent European Green Deal aims to make Europe the “first climate-neutral continent”, with sustainability underpinning many policies. The deal targets a transformation to a resource-efficient economy where there are no net greenhouse gas emissions by 2050, outlining action in the form of investing in environmentally friendly technologies, energy efficient construction and decarbonisation of the energy sector (among others). This will lead to substantial investment in utilities: building out renewable-energy production, upgrading power networks and fitting gas plants with carbon-capture technology. 

It is worth noting that in a sector often synonymous with rhetoric, the urgency for this transition is enshrined in lawA key part of the deal is the European Climate Law, which aims to ensure that all EU policies contribute to carbon goals through a legally binding net zero emissions target by 2050. Increasing sector demand has already been evident in the price action of European renewables stocks this year, with room to run as implementation commences. Europe overall is expected to decarbonise the furthest and fastest driven by fossil-fuel phaseout policies and carbon pricing, leading a coal-heavy China and gas-heavy US. Regardless, these are clearly global trends: solar and wind penetration in the energy mix is expected to increase between now and 2050 by 12% to 35% in the USfrom 16% to 80% in Europefrom 22% to 55% in India; from 8% to 48% in China and in Australia 16% to 78% 

Alongside Europe, the current US presidentelect, Joe Biden, has run on a platform of clean energy, pledging $2tn in spending on climate action over the next four years. Biden is promising net-zero emissions by 2050 and to electrify the US’s transportation sector, installing a vast network of new car charging points, upgrading the grid and deploying utility-scale battery storage across the US. The growth outlook for electric vehicles, renewables, battery storage and other positive carbon transition focused industries is therefore strong.  

More recently, at the latest UN General Assembly, China’s president, Xi Jinping, announced that China will aim to achieve carbon neutrality by 2060; making it a near-full house in terms of carbon transition commitments from key global economies. 

 Clean energy 1

Source: IEA, BloombergNEF 

 

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The transition has already begun 

Estimates suggest 12 trillion watts’ (12 terawatts) of energy capacity will need to be created to service the transition to renewable energy. This is estimated to require approximately $13.3 trillion of new investment between now and 2050 – 77% of which is expected to go to renewables. China and India together are a $4.3tn opportunity especially considering the sector transcendent nature of this growth: by 2016 businesses and households worldwide had invested $1.7tn in solar and batteries. 

In the conventional oil and gas upstream sector, substantial industry investment is being diverted to non-oil and gas ventures. Incumbent oil and gas companies are regenerating their identities and raison d’etre, diversifying their energy production methods and technology. Norwegian supermajor Equinor (formerly Statoil) has been the fastest to act, acquiring multi-billion stakes in US wind farms. Other supermajors such as BP and Shell are set to follow suit following high-profile commitments to becoming carbon neutralThese companies will therefore inevitably be involved in adopting, implementing, buying and acquiring new techequipment and infrastructure across wind and solar to accelerate these transformations. 

Carbon transition will continue to drive capital allocation trends and the solar, hydro and wind sub-industries will benefit from servicing this. Alongside this, there is a growing recognition that renewables can offer steadier returns given the volatility of oil prices over the past decade. In a very real sense, clean energy represents the energy sector of the future. We recognise the diminishing role of fossil fuels as increasing amounts of proven oil capacity remains in the ground as a stranded asset. Legacy energy firms will have to manage their own transition while clean energy firms can act as a hedge against conventional energy sector exposure, benefitting from both direct and indirect (sector) investment. 

What have we invested in? 

We have made a small allocation to the iShares Global Clean Energy ETF in our fully managed and socially responsible portfoliosThis fund provides exposure to 30 of the largest and most liquid clean energy companies globallyMore specifically the fund provides exposure to companies that are involved in clean energy production or clean energy tech and equipment, including, but not limited to, the following: 

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Stock examples from this fund 

Vestas Wind Systems
Norwegian wind turbine manufacturer and service provider, Vestas is well-positioned to capitalise on opportunities in the clean energy space having installed close to 113 GW of wind turbine solutions and holding around 96 GW under service contracts, as of December 2019.  

Enphase Energy INC.
US solar battery storage and smart tech firm that generates more than an estimated 50of its revenues from products or services that help reduce energy consumption and generates substantial revenues from manufacturing solar photovoltaic modules, solar inverters and batteries. 

Verbund
An Austrian hydro-electric power station developer. 

Solaredge
An Israeli grid technology manufacturer, specialising in solar inverters, power optimisers and electrical systems. 

Xinyi Solar
Chinese solar cell manufacturer working on power stations and solar energy equipment. 

Long-term Focus 

While we are clearly optimistic for clean energy as a megatrend, it is worth iterating that as a long-term theme it can initially – in the short term – experience volatilityHowever, for higher risk portfolios where the time horizons are longer and where that volatility is diversified, we see clean energy as a positive driver of medium term returns as it builds on the lower carbon tilt of our current SRI positioningWe expect to see much more to come from this developing investment space and will maintain a strong intelligence focus on it. 

Risk Warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Forecasts are not a reliable indicator of future performance.   

 

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James McManus

James is chief investment officer at Nutmeg, having joined in 2015 from Coutts & Co. A self-confessed ETF geek, James is regularly quoted in the national and industry press and has been voted one of Private Asset Manager’s ‘Top 40 under 40’ in each of the last three years. James holds a BSc in International Business from Nottingham Business School, the CFA UK Investment Management Certificate, and the CFA Certificate in ESG Investing. He can be found tweeting @j_a_mcmanus


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