Renewable energy is the future. The declining supply of fossil fuels, like coal, and climate change, which carbon-based energy has helped the cause, are the two main reasons for our movement toward renewable energy. Renewable energy investment can be an attractive investment for many investors due to its potential, but it also may be risky due to the new technologies involved. If you are interested in building a socially responsible portfolio, here’s an overview of the renewable energy space.
If you are considering a renewable energy investment for your own portfolio, be sure to take advantage of the insights of a financial planner.
The Renewable Energy Industry
The renewable energy market is not just windmills and solar panels. It includes wind power and solar power but also hydroelectric power, bioenergy and geothermal energy. Renewable energy comes from natural sources like the sun, wind and tides. It is converted to usable energy, through technology. It’s estimated that the U.S. renewable energy industry will grow at a 6.1% compound annual growth rate between now and 2025. The growth rate in Europe is projected to be even higher at 6.7%. The projected growth rates make renewable energy investment attractive.
Huge capital investment is required to extract electricity from renewable energy sources, which slows the growth of the industry. Growth is also slowed by a lack of commitment to renewable energy since many parts of the world, like the Middle East, have deep – and vast – fossil fuel resources. But since the transnational transportation of fossil fuels like crude oil and natural gas are vulnerable to geopolitical disruptions, the move toward renewable energy has become compelling. Government regulation on the fossil fuel industry is a key driver of growth in the renewable energy market.
The Asia-Pacific market for renewable energy is poised for the most growth by 2025 due to the rapid rise in population and increasing industrial development in China and India. Factors fueling the increase in the market are severe signs of climate change and greenhouse gas emissions.
Convergence in the industry may be on the horizon with increased electrification of transportation and decarbonization plans that are moving forward. Even though the focus has been on solar and wind energy to date, Europe is a leader in biofuels. The industry in the U.S. is starting to focus on other technologies like advanced batteries, offshore wind and hydrogen.
Investing in Renewable Energy
If you invest in renewable energy companies, you are investing in socially responsible companies that strive to reduce our carbon footprint, clean up the environment and have a positive impact on health. The question is whether companies in the renewable energy industry help you achieve your investment goal, which is presumably maximizing your returns. This means investing in companies that can help you achieve that goal regardless of other factors like whether or not they are considered socially responsible. All companies work to maximize their shareholder’s wealth. In theory, social responsibility should help them achieve that goal.
It may become a question of your conscience vs. your renewable energy investment returns. Here are some pros and cons of socially responsible investing in general and investing in renewable energy specifically.
Pros of Renewable Energy Investment
- If you believe in the social responsibility of green energy firms, you are behaving in a manner consistent with your convictions if you invest in renewable energy. You believe in the need to reduce our carbon footprint, lower emissions and increase our use of cleaner power.
- You are rewarding ethical companies. Companies that have a socially responsible mission will be rewarded by your faith in them, no matter how large or small your investment.
- Renewable energy requires less maintenance than other energy sources since it is derived from natural resources.
- There is a continual supply of renewable energy.
- The cost of renewable energy does not fluctuate as much as it does for other energy sources since most of the money is spent upfront on infrastructure.
- There are a number of different kinds of renewable energy companies to choose from. You could invest in any of the different types of renewable energy and any of the aspects of renewable energy associated with each, like companies that store the energy, manufacture the necessary equipment to deliver the energy and more.
- The cost of operation of renewable sources, compared to some fossil fuel sources, may be less.
Cons of Renewable Energy Investment
- You may be ignoring a lot of good investment opportunities in the name of social responsibility.
- Some renewable energy sources are dependent on weather and changing weather, not to mention taxpayer subsidies. Due to weather considerations, some sources are not available in certain areas.
- Some renewable energy sources require large parcels of land for their installation.
- Because renewable energy technology is new, the efficiencies of production are not there yet, which may eat into profits.
- Storage of energy is an issue since the production of renewable energy may be intermittent. The cost may be high.
- Some companies profess to be socially responsible but are not. They may be socially responsible in one area of their business but not in other areas.
- It’s essentially up to you to determine if your definition of social responsibility fits the companies you are considering for investment.
- There are issues among even socially responsible renewable energy companies. Rare earth minerals are used in the manufacturing process of some of the equipment. Disposal of the equipment may be difficult and not environmentally friendly. Windmills, for example, may kill birds. Large solar farms may disrupt wildlife. Erecting dams to generate hydroelectric power displace people, destroy wildlife habitat and damage ecosystems.
- Claims that Earth’s supply of fossil fuels is near exhaustion are grossly exaggerated, according to advocates.
Diversifying With a Renewable Energy Investment
While the goal for your investment portfolio is to maximize your total return, you also have to consider risk. Diversification of your portfolio is the process of reducing risk while maximizing your return. For example, if you want a diversified portfolio, you would not invest in all energy stocks, bonds, exchange-traded funds (ETFs) and mutual funds. Instead, you would spread your portfolio among a few financial assets in different market sectors and industries.
The lines of social responsibility are blurring between companies and it’s hard to tell which businesses are socially responsible and which are not. Unless you want a portfolio of all socially responsible firms, you can diversify your existing portfolio by adding a renewable energy investment to it.
The NASDAQ has a clean energy index, CELS, against which you can track an investment. You can also buy shares of a clean energy index fund that gives you exposure to renewable energy across types of energy. There are several ETFs in the clean energy sector along with the stocks of a number of clean energy companies. One of these approaches would be a step toward diversification and would give you exposure to the renewable energy sector.
The Bottom Line
Investing in renewable energy supports a sector of our markets with long-term growth potential. Even though renewable energy companies are highly leveraged due to the fact they are capital intensive, there are solid companies with reasonable debt ratios and good long-term growth prospects. It only takes a few well-chosen investments to diversify a portfolio and renewable energy could be for you. It would likely add an element of social responsibility to your portfolio, offset risk if you are invested in a fossil fuels energy company and provide general diversification.
Tips for Investing
- If you think you might want to invest in renewable energy securities, it would be best to talk with a financial advisor. Finding one doesn’t have to be hard. If you use SmartAsset’s financial advisor matching tool, you can find a financial advisor to your liking. If you’re ready, get started now.
- If you’re interested in renewable energy, consider investing in corporations that practice corporate social responsibility (CSR), which is a voluntary, self-regulating business model that entails incorporating environmental and social concerns into a company’s policies and practices.
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