Clouds Lift for Clean Energy Investment

The first half of 2022 has not been kind for the renewable energy sector. Soaring fossil fuel prices are drawing more investment into oil and gas, delaying much-needed green energy projects. According to the International Energy Agency (IEA), about 100 gigawatts (GW) of currently contracted renewable energy projects are at risk of delay due to commodity price rises. It could end up costing an additional US$ 100 billion to install this capacity.[1]

While the challenges are real, we believe they are temporary. Over the long term, the global transition to renewable energy will bring socio-economic benefits that present compelling investment opportunities. According to the International Renewable Energy Agency, it found that doubling the share of renewables by 2030 would bring a range of positive impacts including an increase in global gross domestic product (GDP) up to 1.1 percent, improvement of global welfare by 3.7 percent and over 24 million people working in the renewable energy sector.[2]

There are already signs that the clean energy trend will continue. The IEA now predicts a record amount of renewable capacity will be added in 2022 with an expected increase of more than 8% compared with last year and surpassing the 300 GW level for the first time.[3]     

The new focus on energy security will prompt policymakers to examine ways of reducing reliance on imported fuels, while high fuel prices will accelerate electric vehicle (EV) adoption. More significantly, the cost of renewable energy is falling as economies of scale increase.

In fact, 2021 was a record year for renewable energy: close to 290 GW of new renewable power was delivered across a range of technologies.[4] Solar PV (Photovoltaic) accounts for more than half of all renewable power growth in 2021 – capacity additions grew by 17%. Drivers include a doubling of new onshore wind installations in 2020, reaching almost 110 GW and the IEA forecasts new additions will average 75 GW per year between 2021 and 2026. Total offshore wind capacity is forecast to more than triple by 2026, reaching 21 GW.

This longer-term growth outlook suggests that the energy transition remains a huge investment opportunity. Researchers at Stanford University in 2019 predicted that the transition to 100% renewable energy by 2050 would cost US$73 trillion – but that renewables will pay for themselves in less than seven years.[5]

Investors, however, should remember that clean energy investments are not a guarantee of outperformance: they will need to pick their spots carefully to avoid further shocks to their portfolios.

Profits with purpose

By seeking strong renewables stories, investors can effectively ‘reward’ companies that accelerate decarbonisation without sacrificing future growth. BNP Paribas’ 2021 Global Entrepreneur & Family Report reveals that only 43% of investors globally believe sustainable investments translate to a short-term reduction in growth – down from 71% before the pandemic.[6]

Globally, sustainable investments are gaining ground and the BNP Paribas report shows that 49% expect advice on sustainable investment portfolios from their wealth managers. This expectation is even higher in the US (60%) and Switzerland (64%). Some also expect their wealth managers to provide a suitable rating system to make their selections, especially in Indonesia (64%) and the UK (58%). Millennipreneurs and female investors are mostly self-reliant when it comes to sustainable investment research, while Boomerpreneurs tend to complement that research with recommendations from their wealth advisors. Investment opportunities into clean energy are of top interest to more than half of entrepreneurs in the US, China, Singapore, and some European markets like Italy, Poland, Spain and France. Sustainable agriculture, safeguarding biodiversity and the circular economy are other major points of interest. Entrepreneurs are changing their choices and behaviours to be more conscious of the social and environmental challenges that have been highlighted by the pandemic – with more recycling and reducing food waste the primary adjustments globally.

But choosing the right investment is important if investors are to channel capital into companies with a sustainable future. The simplest way to express their view on renewable energy is by buying the equities of green energy companies or specialist renewable energy funds or exchange-traded funds (ETFs).

As with all investing though, a degree of research or advice is required: while confusion over fund labelling and ESG ratings persists, regulatory scrutiny of greenwashing will increase. Ultimately, this process will bring much-needed clarity to ESG investing, but rules and standards are still evolving and regulators have yet to agree on a harmonised approach. Until such time, investors should seek professional advice on what is most suitable for their needs.

Hands-on measures

As well as seeking investments to drive the renewable energy transition, people can make a difference by taking action closer to home. Renewable energy has implications for families and individuals wanting to take control of their own finances. For instance, they can install solar panels at home to reduce demand for fossil fuels – and save on energy bills. Greater energy efficiency through better insulation and smarter use of home cooling and heating can also make a significant dent in fossil fuel demand. Similarly, energy-efficient lighting and appliances can also go a long way toward reducing consumption.

Current concerns about rising energy costs – and the inflation they drive – may ease in the coming months. But the global drive to end climate change has a longer time horizon, as well as enormous policy and public support. Investors have a raft of opportunities to put their capital to work in service of this long-term trend.