Environment

Investing in clean energy to profit from an unstoppable trend

Global energy demand continues to rise. Yet fossil fuels are slowly depleting, with oil and gas expected to run out by the 2050s, and coal only expected to last a few decades longer. Meanwhile, the negative impact on the environment of carbon dioxide emissions as well as fossil fuels general contribution to climate change and global warming has been well documented.

Clean energy is the solution

Clean energy based on renewable sources like sunshine, rain, wind or heat are therefore slowly going to increase in prominence. That will be based on increasing energy consumption in and by itself (+40% over the next 20 years by some estimates), but also as an indispensable “green” alternative to traditional energy sources which are slowly running out.

Renewable energy is already contributing some 14% to US energy production, 25% to Chinese energy production and 32% to German energy production. At the current pace, some predict that by 2040 the US figure will rise to 23% while the European Union is aiming at 100% by 2050. Globally, the International Energy Agency estimates that 40% of all energy will be from renewable sources by 2040.

Obviously the Paris Agreement also comes into play here, making its original 195 participants set ever more ambitious goals in terms of global emissions reductions, and aiming for those to peak as soon as possible.

And what is the impact of it all? The reduction (or slowdown) in global warming and improved public health from lower pollution levels are some of the clear environmental benefits from clean energy. Meanwhile job growth, greater stability in energy prices and energy independence are some of the economic benefits.

Where to invest to benefit from this trend

In just over a decade, the clean energy sector will have seen further investments of upwards of $5 trillion, growing at some 10% per year. Allocating money to firms active in producing the following types of renewable energy should reward investors in the long run:

  • Solar energy. sun light converted into electricity, using either photovoltaic systems (panels) or concentrated solar power (heat). The former technique dates all the way back to 1876, and is currently the fastest growing renewably energy source.
  • Wind power. Using air flow to power wind turbines which generate electric power. Typically takes the shape of either offshore or onshore wind farms, where the former is obviously more costly to construct though tends to get more and stronger winds.
  • Tidal and wave power. The power of waves and tides in the world’s seas and oceans converted into electricity using turbines. Still in early stages of development, but with some potentially interesting properties such as the fact that tides can be predicted centuries in advance while wind and sun patterns change more frequently.
  • Biomass and biofuel. Getting energy from burning organic matter such as manure, plants, crops, etc. Produces emissions when being burned but since the source is renewable is classified as a renewable energy source
  • Geothermal. Tapping into the heat of the earth through steam, magma or underground hot water reservoirs and converting that into electricity

Portfolio Construction: one ETF to capture it all

  • The portfolio constructed here is very simple and consists solely of one single ETF: the iShares Clean Energy ETF. This invests in 29 of the most liquid traded companies within the clean energy equity universe
  • Within this ETF, you get 30% US exposure, 27% China exposure and 43% exposure to other countries through a total of 29 holdings
  • Some of the larger holdings are First Solar Inc (7%), Enel Americas (5%) and Siemens Gamesa Renewable Energy (5%)
CategoryNameIDTERAlloc %
Clean EnergyiShares Clean Energy ETFICLN0.47%100.0%

Risk, Diversification And Allocation

  • Risk level: high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-75%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 2.4%
  • Ex-ante predicted volatility: 13.1%
  • 1 year 95% Value-at-Risk: -19.8%
  • Scenario 2008 Lehman Brothers default period: -22.9%
  • Scenario Interest rates +100bps: +3.2%
  • Scenario 2008-2009: -0.2%
  • Scenario 2010 onwards: +101%

 

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Categories: Environment, Themes

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