It has been a slower start than many expected, but the shift to renewable energy from fossil fuels is continuing. That means it’s something that long-term investors should be keeping a close eye on. Here’s how to invest in renewable energy.
How to invest in renewable energy
It hasn’t been hugely profitable for investors yet, but renewable energy is one investment theme that definitely has legs over the coming decades. Crude oil may be cheap now, but fossil fuels are a finite resource, so many of the world’s energy companies are shifting their focus to renewable energy sources such as wind, solar, biofuels, hydro, and tidal power.
European Union (EU) targets are for 15% of total energy to come from renewable sources by 2020, although Britain was not on course to meet this target even before the Brexit vote, and now it may be scrapped altogether. However, the UK is still bound by the national Climate Change Act, which demands an 80% reduction in emissions by 2050. The government will need to subsidise renewable energy sources to meet its targets. Savvy investors know that backing the innovators in renewable resources could prove a winning strategy, with green and ethical credentials, as well as financial rewards. But it’s not without risk, as the past has proved.
The renewables space is still nascent and emerging, some technologies are fairly untested, so you should treat it as the specialist investment it is. But if you’re still interested, here are some ways you can be invested.
You could consider buying shares in companies operating in the renewables space, such as European wind turbine manufacturers Vestas Wind Systems, Greencoat Renewables, and Gamesa Corporacion Tecnologica. There is also US solar panel maker First Solar. German industrial giant Siemens has a lot of exposure to solar and wind power too, and car manufacturers Tesla and GM are among those developing the electric cars of the future. In the UK, small-cap Good Energy and big-six energy supplier SSE are both putting a lot of their efforts into renewables and could make good additions to your portfolio.
Exchange-traded funds (ETFs) are passive funds which replicate the performance of major markets or collections of stocks at a lower cost than holding an active fund. One of the best known ETFs in the alternative energy space in Europe is the iShares Global Clean Energy ETF, which has been around since 2008. It offers exposure to 30 of the world’s largest companies involved in clean energy, but it’s still fairly small with just $103 million in assets under management.
You can use our ETF screener to find the right ETFs for you.
Funds and investment trusts
There are a number of listed funds available now that focus on clean, green or renewable energy, such as Pictet Clean Energy, BlackRock Global New Energy and Guinness Alternative Energy. Or if you want to control your exposure to renewables, you could buy a more balanced energy fund which has some of its portfolio in these investments, but also spreads risk by holding more mainstream energy stocks too.
A slightly more indirect route could be to buy a China or Asia Pacific equity fund. China’s government intends to plough $360 billion into renewable fuel by 2020, and smart fund managers will make sure their portfolios reflect this theme.
Retail bonds, mini bonds and debentures
Some renewable energy companies issue bonds or mini bonds to raise money to fund their activities. You will usually need to tie your money up in them for a certain time period. A retail bond is regulated and listed on a market, while a mini-bond is not. You may be promised a fixed rate of return at maturity, but there are no guarantees.
Debentures are regulated, tradable debt instruments that are similar to bonds. Through them, you can make investments into individual projects that focus on solar or wind power, for example. They may give you regular payments of capital and income from the project over time rather than one payment at maturity. You should expect to hold them for the long term, even as long as 15 to 20 years.
Crowdfunded bonds and the Innovative Finance ISA
The government launched the Innovative Finance ISA last year to give savers a tax-efficient way to participate in peer-to-peer lending. Official figures for the last tax year showed low take-up of the new ISA so far, with just £17 million invested. But there are renewable projects available through this route so it could be worth a look.
A crowdfunding platform called Abundance Investments launched what it said was the UK’s first green energy ISA in 2016. It allowed customers to invest directly in renewable energy projects through a range of bonds, and predicted a 6% annual return. Although the ISA itself is very new, this offering proved popular and sold out quickly. Abundance has more projects in the pipeline, and other providers are following suit, bringing more choice to investors interested in supporting green projects on a long-term view.