Speaking to Investment Week, Nitesh Shah, head of commodities and macroeconomic research for Europe at WisdomTree, argued the gap between environmental goals and current policies is “so wide” that all green technologies are likely to see massive boosts to “plug the chasm” in the coming decades.
Emma Wall, head of investment analysis and research at Hargreaves Lansdown, agreed, noting that as oil and gas prices have soared with the Russian invasion of Ukraine, renewable energy “holds the answer to this problem”, leaving the UK able to both meet net zero commitments and target energy independence.
While WisdomTree’s Shah said it was hard to know which renewable energy sector will do best, he stated that battery technology was set to be a “clear winner” due to the fluctuation of renewable energy production from wind and solar.
Shah explained: “They allow for storage when production is in excess of demand and release of power when demand is in excess of production.”
He also noted that batteries are essential for decarbonising transportation, as electric vehicles rise in popularity.
Stability, income and impact
Alan Burnett, head of wholesale clients for UK and Ireland at ThomasLloyd Group, described renewable energy as the “most compelling” way to capitalise on the climate transition, with strong tailwinds in high growth and emerging markets as energy demand increases.
Burnett argued there were four key reasons why renewables were so appealing: stability, income, impact and diversification.
“Renewable energy investments tend to be in real assets, which can offer stability and visibility of returns, often with an attractive absolute return profile,” he said.
“Focusing on high growth and emerging markets where demand for energy is generally inelastic, the current funding gaps and supportive legislation means the underlying asset can generate strong risk adjusted returns that have low correlation with other asset groups.”
Income is also appealing to investors and Asia was “at the top of the list” for Burnett, as solar projects are far cheaper than Europe or North America, while also seeing significantly better irradiation levels.
Impact is obviously especially important, as providing new sources of energy prevents an expansion of fossil fuels, which are also increasingly expensive.
Meanwhile, Burnett noted there are a variety of ways to invest in renewables, including traditional real asset funds, credit funds or green bonds, but also through renewable energy investment trusts.
Geographic diversification is also increasing quickly, as Asian countries such as India or Vietnam begin to offer “the most compelling investment case”, Burnett noted, due to lower inflation and higher population and GDP growth.
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WisdomTree’s Shah added there was ample opportunity for diversification within batteries when examining the full value chain.
He pointed to raw materials, processing and manufacturing, recycling, developing new technologies and even the firms providing infrastructure for battery users to operate, such as smart metering and electric vehicle chargers.
The raw materials for batteries could be particularly appealing, as the many uses for various components used in batteries provides strong diversification. He pointed to silver in solar panels, platinum in green hydrogen and tin in electrical components as examples.
Hargreaves Lansdown’s Wall also touted diversification as a benefit when she argued the case of the WHEB Sustainability fund.
The fund invests in nine sustainable themes, such as resource efficiency and sustainable transport, with about 6% of the portfolio made up of renewable energy firms.
Wall highlighted this was the only fund managed by the WHEB team, “meaning they are totally dedicated to it and focused on its success”.
The fund is focused on small- and medium-sized companies, allowing for greater diversification than the wider market but also greater risk.
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Wall was also particularly bullish on renewables providers, specifically wind, explaining the renewable source is “particularly attractive” for the UK as the “windiest country in Europe”.
She pointed to Greencoat UK Wind trust, which invests in over 40 operating wind farms that produce enough energy to power over 1.5 million homes.
However, Wall warned the trust’s revenues depend on both the attractiveness of wind farm investment and wind conditions, neither of which the firm has control over. Nevertheless, she said the trust’s team was “encouraged” by a variety of future projects.
Meanwhile, John Teahan, portfolio manager for Redwheel UK Value & Income strategy, made the argument that a focus on current high emitters could be a good way for investors to push the energy transition.
Teahan gave the example of the transformation of Danish Oil & Natural Gas Company to Ørsted, which moved from an oil and gas producer to a wind power generator.
The manager argued the move has been rewarded “handsomely”, with Ørsted recording 3.7 times the return of the Stoxx Europe 600 index since its IPO in 2016.
Other examples of fossil fuel companies moving towards renewables include EDP Group spinning out EDP Renewables in 2008, which has now seen shares outperform Stoxx Europe over the last ten years by five times. It now accounts for 85% of the EDP Group’s market cap.
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Arguing that opportunities often arise from “within a carbon intensive company rather than outside”, Teahan said investors should look to firms in the early stages of transition, rather than the “winners of the past”.
He listed major European oil companies such as Eni, TotalEnergies and Shell as possibilities, which all offer low valuation and conservative gearing.
“There is no doubt that both risk and opportunity will be very much a feature of this transition to a low carbon economy, but a singular focus on current carbon intensity may mean missing out on the best investment opportunities of the next decade,” he added.