It ain’t easy going green

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This article was published 27/04/2024 (760 days ago), so information in it may no longer be current.

Investing in clean energy makes a lot of sense from a long-term perspective. However, recently, holding renewable energy companies and those supporting it with equipment and technology, has been a painful experience for investors.

“Performance has just been terrible for the last three-plus years,” says Mike Thiessen, co-chief investment officer at Genus Capital Management in Vancouver, which specializes in responsible investing, including clean energy.

“One of the big headwinds for renewables has been higher interest rates just because it is so capital intensive.”

Many have seen share prices dive since 2022. That includes Canadian Solar Inc. — a leading manufacturer of solar panels, based in Canada but listed on the NASDAQ in the U.S. Its share price is down about 75 per cent from its peak in early 2021.

At the time, many clean energy stocks soared to speculative heights as investors expected U.S. President Joe Biden’s election and a Democrat-controlled Congress to push through legislation supporting clean energy.

“It was riding a wave of very positive sentiment,” says Tim Nash, co-founder of Good Investing in Toronto, focused on sustainable investing strategies.

“This was a time when many responsible investors thought there was a good chance there’d be serious action from the world’s largest economy.”

Eventually, Congress did pass the Inflation Reduction Act in 2022 — which resulted in 280 clean energy projects in the U.S. its first year alone, representing $282 billion of investment.

Yet, the industry has been — like many other sectors — weighed down by higher interest rates and inflation. The dividend yield, for example, of many renewable utilities such as Algonquin Power & Utilities Corp. became less valuable versus the yield of a government bond — which went from just under two per cent three years ago to closer to four per cent per year today.

That said, Algonquin today pays a seven per cent-plus yield because its share price is down more than 50 per cent from its peak.

“We saw a massive amount of costs stepping in (inflation and higher borrowing costs) and really showing how the sector … and the economy are incapable of processing all of this” demand for clean energy as quickly as anticipated, says Massimo Bonansinga, Toronto-based portfolio manager for the BMO Climate Transition Fund. “The sector has been a victim of its own success.”

Renewable energy’s growth is indeed a success. Renewables are expected to overtake coal as the largest energy generator in the world by 2025, International Energy Agency data show.

As well, it is now the cheapest source of energy, a United Nations report highlights. The headwinds, however, are not merely financial growing pains.

Renewable energy faces political push-back from the far right. Notably, former U.S. president Donald Trump — running again as the Republican candidate — has voiced his opposition to renewables.

“There is this anti-woke sentiment,” Nash says. “The pendulum really has swung the other way.”

Certainly, being a clean energy investor today is difficult.

Yet, the current market, driven by negative, short-term sentiment, presents an opportunity today that could become even better — no matter the 2024 U.S. presidential election outcome.

In fact, Trump’s election could result in an excellent time to buy beaten-up clean energy stocks with long-term upside. Of course, a Biden re-election would likely juice the sector, given its woes are partly driven by sentiment a Trump win would be the industry’s undoing.

Thiessen notes, try as he might, Trump is unlikely to reverse the energy transition.

For one, the aforementioned U.S. legislation has been a positive for his voting base. “About 80 per cent of the investment from IRA has gone to Republican states,” he says, noting it has led to reshoring of manufacturing for clean energy from China.

Furthermore, the industry is now driven by good fundamentals long-term, Bonansinga says. “I see this as a buying opportunity for the next … 15 years of this process toward decarbonization.”

He likens the 2020s to 1920s, when oil and gas use, automobiles and other technologies boomed. This time around, it’s electric vehicles, clean energy and artificial intelligence — which, by the way, requires a lot of energy.

Huge doesn’t fully describe the scope.

According to BloombergNEF — which tracks the industry — the global investment required to achieve net zero by 2050 is more than US$4.8 trillion annually between this year and 2030 alone. By comparison, in 2023, the industry saw about US$1.8 trillion of investment.

“If investors believe in the long-term trend of clean energy, then recent weak performance could be an opportunity,” says Todd Rosenbluth, head of research at VettaFi in New York City.

For investors seeking exposure, mutual funds and exchange-traded funds (ETFs) offer a risk-adjusted approach. He adds: “It is hard to identify the likely winners, so diversification … is paramount.”

Plenty of clean energy funds exist and new ones are launched yearly. That includes Goldman Sachs Bloomberg Clean Energy Equity ETF, offering a mix of “utilities, industrials, information technology and consumer discretionary stocks” making the most successful headway in the energy transition, Rosenbluth says.

The tremendous opportunity aside, investors should keep clean energy investments to a small part of a portfolio.

Consider it part of the ‘do-more-good’ or impact investing sleeve — about 20 per cent or less of your portfolio. And the remainder — if you consider yourself a responsible, sustainable investor — would be to ‘do-less-evil’ investments. These are widely held companies across most sectors that have strong environmental, social and governance records, Rosenbluth adds.

“You don’t want to invest too much into ‘do-more-good’ thematic funds because they are very volatile.”

Then again, you do not want to overlook clean energy’s upside either, Thiessen adds.

“But it’s important to remember you’re a long-term investor,” he says. “Clean energy is not a quick in-and-out investment.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com