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Is there profit in clean energy?

Investment | Shares

By Justin Modray, published 10 May 2011.
Helpful? 6

Can you profit from climate change or will it hurt your portfolio as well as the environment?

What is clean energy?

Clean energy means power derived from renewable/sustainable sources such as solar, wind, water, geothermal and, to some extent, biofuels. The advantages over energy derived from finite fossil fuel sources such as oil, gas and coal is that they are far less likely to run out or pollute our environment. Nuclear energy falls somewhere between the two - while sustainable long term there are issues over used radioactive material and severe pollution in the event of accident.

Is the future green?

The simple truth is that (to some extent) it has to be. Our reliance on fossil fuels can't last forever, especially as emerging market demand for energy will soar in years to come. However, in the short term developed countries seem more concerned about repairing their fragile economies and emerging countries want to keep growing theirs - clean energy tends to take a back seat unless forced.

Despite the relative failure of the Copenhagen Climate Change talks in late 2009, there is a general move towards greater use of clean energy and a number of countries and economic regions have set their own renewable energy targets. Expect clean energy to once more feature more prominently on the global agenda within the next 5 years.

The table below gives some idea of where renewable energy usage (as a % of total) stands at present and the extent it must grow to meet targets (note: I've found it surprisingly difficult to source accurate data for current renewable energy usage, figures shown are broadly correct):

Country/RegionPresent UsageTarget by 2020
UK 3% 15%
EU 11% 20%
US 9% No target
China 8% 15%
India 4% No target

The consensus amongst global bodies seems to be that renewable energy usage should reach 80% by 2050 - a pretty major shift from where we are now.

Does this mean good investment opportunities?

Proven clean energy sources will undoubtedly be used more widely in years to come, along with other green technologies still in development. So investments in this area should generally prosper.

However, clean energy investment performance is heavily influenced by the oil price in the shorter term - if the oil price is high then clean energy is attractive and vice versa if it's low. Until oil supply starts to dry up, or we're all compelled to use significantly more clean energy, it's hard to see this changing. Yes, over time we'll almost certainly be compelled to use more clean energy, but with a probable timescale of 10-20 years or more there’ll be little short term change.

If you’re hoping to make a quick buck from clean energy then I’m afraid you’re probably out of luck...unless the oil price rises further or you find a company on the cusp of bringing a successful new clean energy technology to market – easier said than done.

But invest sensibly in clean energy for the longer term and I think it’s very likely you’ll make worthwhile returns, just be prepared for lots of volatility along the way.

What about other green investments?

Clean energy isn’t the only area that could benefit from concerns over climate change. Businesses involved in water and waste management, green transport and sustainable living (e.g. organic agriculture, forestry & ethical science/healthcare) also stand to benefit from global environmental pressure.

But bear in mind that companies focussing on environmental issues tend to be relatively small and often based overseas. This can make them harder to research and potentially more speculative, especially if they're trying to develop new technologies. Plus your investment could be further affected by exchange rate movements. Always try to thoroughly understand a company and the possible risks before parting with your cash.

Are there any investment funds that invest in clean energy?

There are a few, examples include:

ETFX DAXglobal Alternative Energy ETF - tracks a global index of around 15 clean energy companies for 0.65% a year. It has equal weightings between five sectors: solar, wind, geothermal, natural gas and biofuels. As it's a 'synthetic' ETF there is counterparty risk, but I think this is a still a sensible way to invest in clean energy.

Blackrock New Energy Investment Trust - run by an experienced team but it's been more successful at losing money rather than making it in recent years. Its performance fee can also add to cost. Nevertheless, might be worth a punt long term.

Guinness Alternative Energy Fund - an Irish based fund that primarily invests in small solar and wind energy companies across the globe. Performance since launch in 2007 is less than convincing (it has consistently underperformed its benchmark index), although this is a short period of time to judge such a specialist fund.

Other more general environmental funds that partially invest in clean energy companies include the Jupiter Green and Impax Environmental Markets investment trusts. More diversified funds like these might be more appropriate unless you're comfortable with the additional risks of specifically investing in clean energy.

Be careful not to become too exposed to oil prices

Finally, bear in mind that your existing stock market investments will likely have a reasonable exposure to conventional 'dirty' energy companies (oil & gas companies make up about 20% of the FTSE 100). If you also invest in clean energy you might find your portfolio becomes excessively exposed to oil price movements shorter term - ensure you're comfortable with the risks of doing so!

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Readers' Comments (1) - To post a comment please register or login .

Comment by simonwilliams at 4:02pm on 13 May 2011:

Lots of other fund to consider in this space -
diversifciation as you point as it key - balckrock has over 45% in ts top ten holdings -
i think its best to take a top down approach - buy the themes not the managers. As such try index based funds - The Osmosis Climate Solutions ETF is a good example - good luck - its is a long term growth opportunity, just need to ride thru the volatility,,,,