Portfolio Adviser • Portfolio Adviser Magazine Responsible Investing • CLEAN ENERGY

Away from the persistently bleak headlines around climate change, there are some clear reasons to be hopeful when it comes to investing in the clean economy

The dark clouds that haunt the debate around climate change – both metaphorically and in actuality – can often make it seem as if any attempts at action are futile. Away from the often doom-laden headlines, however, when it comes to investing in the clean economy, there are some clear reasons to be hopeful.

The term ‘net zero’ has entered the lexicon of public debate and, while the politicians are yet truly to convince that meaningful actions will follow on from the rhetoric, there are at least cautious words of optimism emanating from those involved in the investment side.

“Last year an extraordinary shift took place among both corporates and investors in their collective attitude to green energy,” says Axa Investment Managers clean economy strategy manager Amanda O’Toole. Indeed, progress has clearly been made in many areas of the economy – and particularly around clean and renewable energy sources.

“The cost of renewable energy continues to fall so it is becoming a cheaper alternative to carbon-intensive solutions,” she adds. “Simultaneously, new innovations in areas such as static energy storage and smart-grid solutions are also contributing to an expanding range of applications for clean energy technologies.”

The potential for investors to benefit from the widespread adoption of clean energy is plain. As Schroder ISF Global Energy Transition fund manager Mark Lacey says, while the full adoption of coal power took around 70 years and oil and gas took 50 years, with renewables the timetable appears to be speeded up.

“We think the full adoption of renewables will take closer to 30 years,” he suggests. “This is because it will be driven by forced change. The severity of the threat posed by climate change means government policy simply has to support the energy transition to renewables.”

Looking towards the European Union, Lacey notes efforts in the past few years to promote sustainable finance and to try and channel more private funding towards greener areas of activity in the wider economy. The European Green Deal, for instance, is aiming to reduce greenhouse gas emissions by at least 55% by 2050 and Lacey argues the proposals would amount to “a reshaping of Europe’s economy”.

“They could have a significant impact on European companies and demand for the products and services they provide,” he adds. “That said, switching to energy generated by renewables and away from fossil fuels is only one part of the energy transition.”

Crucial to any meaningful switch is the development of the necessary infrastructure. Lacey points out that, while wind and solar farms can generate a huge amount of power when it is windy or sunny, this then needs to be stored until it is needed by consumers.

It may not come as much of a surprise to learn the UK is pursuing a somewhat different path to the EU – and indeed Rick Stathers, senior global responsible investment analyst and climate specialist at Aviva Investors, points out that, despite various public statements, there is as yet no roadmap on the country’s net-zero commitment. “We need to map a credible pathway,” he says.

That pathway might once have been the proverbial road paved with good intentions, but Stathers suggests investing in the clean economy has gone from being the right thing to do ethically to the economically sound approach. “It makes sense now,” he notes.

“Investors can exert influence to help build a sustainable economy through their investments,” adds Myron Jobson, personal finance campaigner at Interactive Investor. “Unprecedented amounts are being invested in a seemingly growing pool of sustainable funds, buoyed by growing evidence that such investments can and do outperform mainstream rivals.”

When it comes to clean energy, that money has various touchpoints where it can make a difference. “There will need to be huge investment in the transmission and distribution networks to support increased demand for electricity rather than other forms of energy,” says Schroders’ Lacey.

“In addition, a significant amount of investment is required to make the entire system more efficient and this involves a large amount of technology-driven investment. An important part of this demand is the growing popularity of electric vehicles and therefore new, large-scale charging infrastructure for these will be needed.”

O’Toole agrees investors considering targeting clean energy assets now have to look beyond the more obvious routes of wind, solar and wave power generation. Axa, for instance, sees the clean energy area breaking down into four key sub-themes: low-carbon transport; smart energy; agriculture and food; and natural resource preservation.

“This approach offers investors access to a diversified range of multi-decade growth opportunities that are driving the global transition to a cleaner economy,” says O’Toole.

Other businesses go a lot further than just the four sub-themes. Gabriela Herculano, chief executive officer and co-founder at iClima Earth, which has launched two clean energy ETFs via HANETF, points out the constituent companies within the funds work across 27 sub-sectors.

“It’s not just renewables and electric vehicles,” she says. “We have food solutions, energy efficiency, distributed generation, clean energy and so on.” Herculano argues the approach taken by the iClima funds is distinct: “We negatively screen and we do not allow contamination. We focus on green revenue and minimise brown revenue.”

Combined, these efforts resonate with the current trends in consumer behaviour, says Lacey, who believes demand for such products as electric vehicles are one reason why the transition towards renewables is likely to be so swift.

Add in the arguments that renewables are proving increasingly competitive in terms of cost, and climate change simply cannot be ignored any longer and, Lacey suggests, a tipping point has likely been reached for the needed energy transition.

“In turn, this creates a very powerful investment opportunity,” he says. “Companies can be confident of investing in renewable energy because they now have the scope to make a good return on that investment.”

It is this last point, though, that could be the cause for some further investor angst, particularly when it comes to charitable and philanthropic money. How much is the constant search for economic growth itself part of the problem and what does that mean for the financial services sector? “These are very difficult questions,” acknowledges Aviva’s Stathers.

“All our models are predicated on exponential growth.” Pointing to widely-held assumptions about what can be expected from the application of technology to the world’s biggest problems, he adds: “Necessity may be the mother of invention but this goes beyond just believing in technology. There has to be a conversation about expectations. The consumer model does not address the impact of this at all. There has to be hope in there. It is there. It just might require difficult conversations.”

Those conversations may well start around the issue of clean energy and what investors can do to ensure their money is directed towards areas where they hope and believe it will make a difference.

Where it all ends, though, is rather harder to forecast because the effects on the climate and the environment from clean-energy investment decisions taken today will potentially take many decades to run their course. The sage advice about investing for the long term has never seemed so pertinent.