How to Invest in the Global Renewable Energy Sector

Investing in Solar, Wind, and Other Renewables

Investors use PMI surveys as leading indicators of economic health
Investors use PMI surveys as leading indicators of economic health. Getty Images/KTSDESIGN

The global renewable energy industry reached $476.3 billion in 2014 and is expected to grow at a 10.3% compound annual growth rate to $777.6 billion by 2019, according to BCC Research. With many forms of renewable energy becoming economically viable, consumers have started to embrace these technologies amid growing concerns over carbon dioxide emissions. Investors have also started to reconsider the market as reliance on government subsidies diminishes.

In this article, we will take a look at how investors can capitalize on these trends and invest in the global renewable energy industry.

Regulation Moves Forward

The need for alternative energies is quickly becoming apparent. While carbon dioxide levels have been rising since the Industrial Revolution, the last station on Earth without a 400 parts per million (ppm) reading reached it. The event marked the first time that carbon dioxide reached these kinds of levels in four million years, suggesting beyond a doubt that these problems stem from human emissions rather than natural phenomena.

Governments have increasingly embraced these concerns by passing mandates to limit the amount of harmful emissions. In December 2015, representatives from 195 countries at the 21st Conference of the Parties of the UNFCCC in Paris adopted the Paris Agreement to deal with greenhouse gas emissions, adaptation, and finance starting in the year 2020, which could set the stage for a growing number of regulations around the world.

At the same time, governments have played a role in destabilizing parts of the alternative energy industry. China famously disrupted the solar industry in 2013 by selling massive amounts of photovoltaic solar modules and pressuring other manufacturers around the world following its chronic oversupply.

The industry also relies on a number of subsidies from various countries around the world, including Germany’s heavy subsidies for solar power.

Investing With Equity ETFs

The easiest way to invest in alternative energies is through exchange-traded funds (ETFs) that provide diversified exposure within a given sector. In some cases, investors may want to consider exposure to a specific type of alternative energy – such as wind or solar – or investors may simply want exposure to a broad range of alternative energies. Fortunately, there are many different ETFs that can cater to these various needs.

The most popular alternative energy ETFs include:

  • Guggenheim Solar ETF (TAN)
  • PowerShares WilderHill Clean Energy Portfolio ETF (PBW)
  • VanEck Global Alternative Energy ETF (GEX)
  • iShares Global Clean Energy ETF (ICLN)
  • PowerShares Cleantech Portfolio ETF (PZD)

Investors should carefully consider the components of these ETFs before investing in them. For example, some alternative energy portfolios might be heavily weighted in solar, while others may be concentrated in a single country like China. These elements are important to consider since they may expose an investor to specific risk factors that they may not expect when investing in what appears to be a broad-based alternative energy fund.

Investing in Bonds

Investors have many options beyond equities when it comes to investing in alternative energy projects, including a growing array of clean energy bonds. In some cases, these bonds are issued by companies looking to complete alternative energy projects through municipalities or other sources. In other cases, these bonds are issued by alternative energy consulting firms looking to cost-effectively raise capital to finance projects.

SolarCity is the most popular example of solar-backed bonds. Individual investors can purchase these bonds through the company’s website or their brokerage firm, with each bond backed by tangible solar energy installations. These bonds are similar to traditional bonds in that they make regular interest payments and mature at a certain date, but purchasing them helps improve the affordability of solar installations throughout the United States.

On a global level, investors can purchase bonds in a number of alternative energy companies as an alternative to purchasing equity. Bonds may be preferable in many cases because they provide a lower default risk since they have preferential rights to a company’s assets.

The Bottom Line

The global renewable energy sector is expected to see ongoing growth as governments push to meet new mandates. While the industry has experienced volatility in the past, investors can purchase clean energy ETFs as a way to diversify their exposure and reduce risk. Clean energy bonds may also be an attractive option to reduce the risk of default and generate predictable returns over time.