Themes in focus: renewable energy

Five reasons we like the renewable energy investment theme.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 18th November 2020

Some now estimate that within this decade investment in renewable energy is set to surpass the oil & gas industry for the first time in history. This will be a massive milestone, proving that renewable energy is no longer on the fringe of energy generation but instead taking centre stage for a new chapter of economic growth.

We outline five key reasons we like renewable energy below:

1) A supportive regulatory backdrop…

The Paris Agreement is the first-ever legally binding global climate change agreement, thereby laying out a global framework to avoid dangerous climate change, according to the EU Commission. Governments from around the world agreed a long-term goal of keeping global average temperatures well below the 2°C above pre-industrial levels, instead aiming to limit the increase to 1.5°C. Since then, numerous governments have passed into law commitments to reach net zero carbon emissions by 2050.

2) …could lead to increased investment…

It is estimated that low-carbon investments in energy production and refineries are projected to average between $1.6-3.8 trillion per year globally to 2050, according to the Intergovernmental Panel on Climate Change. This presents an incredible opportunity for investors to gain exposure to companies meeting rising demand for products or services required to produce renewable assets, or indeed to gain exposure to operational assets that benefit from falling costs of capital.

3) …in an obvious solution to a low carbon world

As opposed to developing new carbon capture, utilisation and storage technologies which most analysts estimate will fall short of current climate goals, the obvious solution will be to look for alternative energy sources. While natural gas is likely to be only a steppingstone between traditional fossil fuels and lower-carbon alternatives, policymakers, corporates and investors will require a range of clean energy solutions to meet the growing energy demand. These are likely to include wind power, solar photovoltaic cells and hydroelectric.

4) A supportive backdrop leads to lower costs of capital…

We believe that an increasingly supportive regulatory backdrop globally enhances the risk profile of low carbon energies such as renewables which has major implications within capital markets. One factor that is most affected is the cost of capital for clean technology projects which in recent years has fallen significantly below its fossil fuel peers. This provides a plethora of opportunities across the clean technology value chain as renewables become more affordable and competitive without the need for explicit financial subsidies from government.

5) …and is being touted as an engine for future growth

While renewable energy is not perfect – the wind doesn’t always blow, and the sun doesn’t always shine – there is another huge opportunity for other clean technologies to be developed to aid the transition. These range from industries relating to battery technologies which are essential for delivering a stable supply of energy to national grids, to those focused on providing solutions for efficiencies reducing the overall demand for energy. With trillions of dollars set to be invested on an annual basis in low carbon energies, there is a strong potential for both employment and economic growth to centre around this theme.

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    Tertius Bonnin

    Tertius is an Investment Analyst on our research team. He focuses on investment ideas within US, global and thematic equities, and sits on our fund selection committee.

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