4 Niche Areas Driving Renewable Investments

The clean energy sector has been reinvigorated by the COP26 summit, prompting renewed pledges for carbon-neutral goals set by all major economies of the world. That, in turn, is driving interest in a slew of green programmes and related financial investments.

The sector is garnering interest from investors not just because of the regulatory and environmental considerations, but also because the potential return on investments.

For example, research conducted by the Imperial College London and the International Energy Agency (IEA) has revealed that investment in renewable energy in Germany and France generated returns of 178.2% between 2015-2020. In the same period, fossil fuels generated a -20% return.1 Similarly, in the United Kingdom, renewable energy investments generated a 75.4% return, whereas fossil fuels generated 8.8% during the same period. In the United States, investments in renewable energy provided a 200.3% return, whereas fossil fuels delivered a 97.2% return.

While governments and financial institutions have been on the forefront of investments, a number of unique investment opportunities are emerging for retail investors as well that include:

  • Investing in Renewable Energy ETFs: Renewable energy-based Exchange Traded Funds (ETFs), whose focus ranges from solar energy, wind, hydropower, and geothermal firms, are increasingly drawing interest, as one way to diversify portfolios and enhance returns. ETFs also tend to be less costly than mutual funds, while clean energy ETFs give access to energy firms without the need to buy the shares directly.Here’s a look at best-performing renewable energy ETFs in the 12-month period ending Feb 20222

Investment

  • Climate-related special purpose acquisition companies (SPACs): In 2021, SPAC reverse mergers via SPACs gained prominence in a range of industries, including climate technology. Overall, the year saw over 50 businesses secure over $35 billion in SPAC and PIPE (Private investment in public equity) funding. Transportation was the most active sector in terms of climate technology financing, raising $23 billion from SPACs (66%)3,  Over 29 SPAC mergers involved the low-carbon transportation sector, while 19 included electric vehicles (EVs) or electric aircraft. The acquisitions of the US-based Lucid Motors ($4.4 billion), Singapore-based Grab ($4.4 billion), and US-based Joby Aviation ($2 billion) were among the largest transport SPAC reverse mergers3

    While the SPAC process can be complex, it provides a more efficient and cost-effective option for businesses to go public than traditional initial public offering (IPOs). SPACs have been particularly popular with pre-profit or even pre-revenue businesses.

  • Clean energy and EV stocks: Clean energy stocks, as a whole, gained 13% in calendar year 2021. That was lower than 2020 when the sector gained 88%3Over the previous two years, clean energy equities have increased by 112%.

    In 2021, electric vehicle stocks outperformed the overall market, growing 27% YoY against the background of favourable policies related to vehicle electrification3.

  • Niche renewable sectors drawing private equity interest: Unlike solar and wind that have already become mainstream for large institutions and private capital, there are a few niche sub sectors within renewables that are currently hot. These industries include a diverse array of low-carbon technologies that include:
    Niche

      To learn more about opportunities in the Renewables space, download our report Circular Economy Part II: Renewable Energy. To read the report, click here.

1https://www.imperial.ac.uk/business-school/faculty-research/research-centres/centre-climate-finance-investment/research/energy-investing-exploring-risk-and-return-the-capital-markets
2https://www.investopedia.com/articles/investing/080715/top-6-energy-etfs.asp
3https://about.bnef.com/energy-transition-investment

Subhjit
Subhjeet Vimal
Associate Specialist

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