After a long slump, renewable energy stocks have begun to stage a comeback as inflation is starting to ease and the Federal Reserve is poised to cut interest rates in September.
The big picture is paramount when considering renewable energy stocks. Undeniably, the renewable energy sector has vast potential, and it’s expected to keep growing. Overall, solar and wind power generation have expanded more rapidly than natural gas-fired generation in the U.S. The use of coal continues to decline, and nuclear energy development has stayed fairly even.
A key big-picture challenge to the industry was addressed in an April report by Columbia University’s Sabin Center for Climate Change Law, which attempted to debunk 33 common misperceptions about wind and solar energy, and electric vehicles. The authors stated that “misinformation and coordinated disinformation about renewable energy is widespread and threatens to undermine the (energy) transition.” The UN has also publicly pointed to disinformation as one of the biggest hurdles the renewable energy industry faces.
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Why Invest in Renewable Energy?
Meanwhile, natural gas in the U.S. is cheap, so it’s an attractive option for fueling power plants. It competes with renewable energy projects, as higher interest rates have weighed on financing. Supply chain disruptions and inflation have also bloated the cost of renewable energy installations.
Regardless, the U.S. Energy Information Administration expects solar power generation to grow 75% and wind power to grow 11% between 2023 and 2025. Some renewable energy stocks have underperformed this year, so there’s a runway for returns, and others have started to take off, with gains above 20% year to date.
Some companies, like NextEra Energy Inc. (ticker: NEE), a popular renewable energy investment, are likely to benefit from increasing demand for data centers. NextEra added 3,000 megawatts of new renewables and storage projects to its backlog of work in the second quarter, a promising sign.
Here’s what our roundtable of experienced financial advisors had to say about the potential for renewable energy investments in the near future, in response to some of the most common questions on the topic in internet searches now:
Reader question: Are renewable energy stocks a “buy” now? Are they risky?
KATE STALTER: Renewable energy, as a category, has shown mixed results in recent months. For example, solar energy stocks, as tracked by the Invesco Solar ETF (TAN), have gradually dimmed from their 2021 highs. The ETF is down 27% in 2024 as of early August. Problems including interest rates and tariffs have put a dent in sales; most recently, consumer demand has been low.
Meanwhile, funds from other areas of renewable energy are performing better, reflecting greater investor confidence about other sub-industries. For example, the JPMorgan Carbon Transition U.S. Equity ETF (JCTR), which tracks an index of companies that stand to benefit from a transition to a lower-carbon economy, is up 16% in 2024 as of the end of July. The carbon credit market is relatively new, meaning investors may be trying to get in early on what they hope will be a growing opportunity.
JULIE PINKERTON: Renewable energy stocks are trading at lower values than what many might believe given the continuing push into climate change and environmental, social and governance, or ESG, disciplines. The challenge for many investors is to discern what is the real trajectory of wind, solar and hydroelectric power as compared to the potential “hype” of these clean energy alternatives. When the Inflation Reduction Act was enacted in 2022, it was widely expected that renewable energy investments would get a huge shove forward, with rising demand accelerating needed infrastructure. However, that scenario has not borne out in reality, and the U.S. has struggled to deploy these committed funds to the still desperately needed infrastructure.
For many of the entrepreneurial startups that investors may be considering, the cash-intensive nature of the infrastructure is going to teeter as we close out the 2024 presidential election cycle, given the contrasting views of the respective political parties. It is estimated that more than $150 trillion of investment will be needed to fully decarbonize the global economy at a time when even leading countries are struggling with general economic headwinds, such as still-elevated inflation and multi-front military conflicts.
KATE: And as always, any equity investment carries risk and may outperform or underperform in various economic or market cycles.
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Are renewable energy funds a better option than stocks? Which ones?
MARGUERITA (RITA) CHENG: Mutual funds and exchange-traded funds do have higher fees and expenses than purchasing individual stocks. But with professional management, investors can benefit from diversification. Renewable energy ETFs include the stocks of companies in the alternative energy sector, which might include solar energy, wind, hydroelectric and geothermal companies. Like other types of funds, green or clean energy ETFs can easily diversify your portfolio. ETFs also tend to be less expensive than mutual funds.
JULIE: What I personally like about renewable energy funds for this type of investing is that there is a significant amount of risk diversification given the sheer number of companies represented. When former investor darlings like Tesla Inc. (TSLA) can find themselves struggling as mightily as they have in 2024, successful IPOs like Rivian Automotive Inc. (RIVN) have cratered share prices and government-backed ventures like solar panel manufacturer Solyndra can become fully bankrupt, it is not easy to consistently find the individual jewels. Additionally, many of the funds capture the infrastructure activity that will be key to the overall success of renewable energy as a whole.
KATE: Yes, as a general rule, a fund will mitigate some risk inherent in single stocks. That’s because, as Julie said, renewable energy funds offer diversification, reducing the risk associated with investing in a single company’s performance. But there are distinctions among clean energy funds, also. There’s not necessarily a “best” investment that fits every investor, but elements such as a fund’s size, underlying index and expense ratio are worth considering.
For example, the iShares Global Clean Energy ETF (ICLN) has over $2 billion in assets under management. It tracks the S&P Global Clean Energy Index, with a tilt toward large-cap stocks. Its expense ratio is 0.41%. The much smaller Invesco WilderHill Clean Energy ETF (PBW) has just $340 million or so under management and tilts toward smaller stocks; both of those characteristics could potentially add risk. It tracks an index of U.S. companies in the clean energy and conservation businesses, and its expense ratio is 0.66%, meaning investors are paying more to own this fund.
Ultimately, the choice of investment comes down to factors including how much risk investors are willing to take, and what their objectives are.
Are oil companies investing in renewable energy?
SCOTT WARD: McKinsey’s “Global Energy Perspective 2023” estimated global investment in power renewables and decarbonization technologies will reach 40% to 50% of total investments in energy initiatives by 2040. Major oil companies like BP PLC (BP), Chevron Corp. (CVX) and Shell PLC (SHEL) are already invested in renewable energy projects.
KATE: Traditional oil companies are making the transition to renewable energy, although for many of these companies, the bulk of their revenue will come from fossil fuels for the foreseeable future.
Oil companies are making these investments for a number of reasons, including diversifying their portfolios, meeting regulatory and environmental targets, and addressing growing investor and consumer demand for more sustainable business practices. Besides those Scott mentioned, companies making investments in renewables include TotalEnergies SE (TTE) and Exxon Mobil Corp. (XOM), big oil companies that have publicly pledged to reduce reliance on fossil fuels and invest in renewables. However, recent merger and acquisition activity within the energy industry has largely been pegged to an expansion of oil-and-gas production.
JULIE: Saudi Arabian Oil Co. (2222.SR) is one of the largest oil producers in the world. It holds the world’s second-largest proven crude oil reserves and outproduces its closest competitor, PetroChina Co. Ltd. (OTC: PCCYF), by a 3-to-1 margin. However, these oil giants see the importance of diversification to maintaining their market-cap positions, and many have found global opportunities in the rare earth minerals needed for clean energy production. Saudi Aramco has also explored hydrocarbon networks, power generation and water desalination projects with the goal to achieve “net zero” status without any reduction in their oil production activities.
BP has focused on offshore wind and electric vehicle charging infrastructure, while Shell has narrowed its focus to solar and wind.
Conversely, the U.S. major oil producers, including Chevron, ConocoPhillips (COP) and Exxon Mobil, have taken a different approach than their European and Middle Eastern counterparts. Because the demand for fossil fuels has never been higher, they have chosen to focus their investments on decarbonizing their products. At a time when current global energy is still supplied by oil and gas (55%) and coal (27%), there is little concern that their reserves and drilling infrastructure are in danger of obsolescence.
The legacy U.S. oil companies also take into account the deep worker skills they have cultivated over decades. When Exxon Mobil announced Mobil Lithium in November 2023, it drilled the first lithium well in the Smackover Formation in Arkansas. This partnership showcases their goal to be the leading producer of lithium EV batteries. But, it also matches their core drilling capabilities with a deepening technical partnership within the automotive industry, including EVs, bringing much-needed cash flow to the renewable startups.
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Are private equity firms investing in renewable energy?
SCOTT: Yes, there were 40 merger and acquisition deals in renewables in the first quarter of 2024, according to data from KPMG. These deals totaled about $4 billion in value, and the number of deals represented an uptick of 91% quarter over quarter. The renewables headliner in the first quarter was private equity firm KKR & Co.’s (KKR) $3 billion acquisition of German electricity and energy producer Encavis AG (ECV.DE).
KATE: Over the long haul, renewable energy will see increased adoption. Solar power, wind power and energy storage are in the sights of the largest private equity firms, such as Blackstone Inc. (BX), Carlyle Group Inc. (CG) and KKR, which have made significant investments in renewable energy projects and companies.
For technologies like renewable energy, which is in the early phase of development and adoption, private equity investment makes sense. Private equity companies can take a longer view as their portfolio companies grow. That’s because they aren’t subject to the same quarterly performance pressures as publicly traded companies. This can allow for more strategic investment and operational improvement in the years before private equity investors make their exit with an initial public offering or a sale.
JULIE: PE-owned firms are picking up their pace in seeking startups focused on renewable energy use. Toward that effort, they are creating entire new regionally based industries. This goes back to the efforts around battery-quality lithium in the state of Arkansas. Due to the Smackover Formation, brines pumped since the 1950s have been found to be an abundant new source of commercial lithium concentrations. As another example of conventional energy redeployment, the Smackover Formation brings critically established infrastructure to new technologies and renewable energy applications.
While many PE firms are seeking fast-moving projects, they are learning that private companies tend to initially lag their publicly traded peers in deriving energy. This is due to efficiencies of scale possessed by the larger, more well-established firms … the critical infrastructure issues that have plagued renewal energy initiatives across the board. However, their continued experience is revealing that the private enterprises begin catching up to their public counterparts in the latter part of year two. Given the cash-intensive nature of this initiative, PE firms are well positioned to drive greater adoption while achieving their own investment goals.
How should I decide between renewable energy stocks and other energy stocks?
KATE: There are a few reasons why you might opt for one type of energy stock over the other. Say you have a belief that renewable energy companies will be among the fastest-moving stocks in the coming years. In that case, you might look to the growth potential of renewables, understanding that you may be adding portfolio risk with newer, not fully proven, technologies.
But if you’re looking for greater portfolio stability that comes from larger, well-established dividend-paying stocks, then traditional energy names may fit the bill. Energy pipeline companies, often structured as master limited partnerships, frequently pay high yields and are reliable income generators. For example, MPLX LP (MPLX), an energy infrastructure and logistics company, pays a forward yield of 8.2% currently and has a history of increasing its shareholder payouts.
What criteria should I use for renewable energy funds or ETFs?
RITA: Both mutual funds and ETFs are subject to market risk. It is important to consider track record, expense ratio and tax efficiency. However, the ultimate decision depends on your priorities. Do you prefer the flexibility of intra-day trading, lower costs or tax strategy? If so, the structure of an ETF may be appropriate for your situation. Do you want to start ESG investing and establish a dollar-cost-averaging arrangement with a modest amount? If that’s the case, a mutual fund may be right for you.
What’s the rule funds must follow for including ESG in their names?
SCOTT: The Securities and Exchange Commission, or SEC, announced a new rule last September that requires all ESG funds to align at least 80% of their investments with their funds’ stated goals.
RITA: Regulators at the SEC have concerns about greenwashing. In response, the SEC has proposed amendments to the Investment Company Act of 1940 and the “Names Rule.” Funds whose names include the terms “green,” “ESG” or “sustainable” would be required to invest at least that percentage of their assets in companies that satisfy the standards of these terms.
JULIE: Right, the SEC determined a need to address the ever-expanding usage of ESG vernacular. By adopting changes to the Investment Company Act and Names Rule, the SEC seeks to give investors a more concise means to understand the goals behind the funds they are choosing. The SEC also sought to delineate specific verbiage for the most commonly used ESG terms and increase portfolio construction methodology and transparency.
In a 2022 PwC report, it was stated that ESG assets under management would reach $33.9 trillion by 2026. As of 2023, ESG investments were still following this trajectory even as Harvard University detailed the divergences it sees coming from political polarization, as well as inflationary economic realities. Renewal energy concerns dovetail well with the goals of ESG investing, given that poorer countries bear a greater burden to meet their basic food, water and heating needs when prices spike to meet escalating demand.
Yet, these same economical challenges can also bring both renewal energy transitions and ESG investing to a standstill when corporate consumers and small businesses are adversely impacted by higher costs. It will remain a delicate dance no matter how imperative the need may be. The new Names Rule can ensure that consumers and institutions are able to more efficiently direct their investments to the funds that they deem to have the greatest overall impact.
Can I find ESG or other ratings for renewable energy investments?
SCOTT: Morningstar, Fidelity and Charles Schwab offer excellent ESG screening resources to investors. Beyond standard factors, like cost and quality management, screening resources can help investors look under the hood of each fund or ETF to quantify whether their investments are actually involved in sustainable energy practices.
RITA: These ratings resources are free and helpful to consumers:
— As You Sow. They empower shareholders to change corporations for good. My daughter references this tool.
— SIF (Sustainable Investment Forum). Of course, I would also encourage individuals to look to SIF to learn more about impact and ESG investing.
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How to Invest in Renewable Energy Now originally appeared on usnews.com
Update 08/09/24: This story was previously published at an earlier date and has been updated with new information.
