Why clean energy still shines for investors

World Earth Day falls on 22^nd April. This year it invites everyone around the world to “unite behind renewable energy, and to triple the global generation of clean electricity by 2030.” However, it comes at a vulnerable moment for the energy transition, with a climate sceptic in the White House and populations increasingly balking at the cost of cutting carbon emissions. 

“When people talk about global warming, I say the ocean is going to go down 100th of an inch within the next 400 years. That’s not our problem.” This was Trump on the campaign trail last year. He withdrew the US from the Paris Climate Change Agreement just days after coming into office with an executive order that also emphasised “economic efficiency, the promotion of American prosperity, consumer choice, and fiscal restraint in all foreign engagements that concern energy policy”.

This has repercussions across the renewable energy industry. Rasmus Errboe, chief executive of Denmark-based wind farm operator Orsted, said the company was under pressure from rising costs, supply chain strains and uncertainty over electricity prices. He said Trump’s tariffs would also raise the cost of projects in the US. A report from the group showed that the cost of producing electricity from offshore wind in northern Europe has risen 50% since 2020, reversing a 70% decline from 2015 to 2020*.

Nevertheless, the problem of climate change remains acute. Peter Michaelis, manager of the Liontrust Sustainable Future Global Growth fund, admits that Trump introduces new uncertainty, but adds: “The urgent need to decarbonise our economy remains as important as ever, and despite some pushback in political circles, the fact that virtually all the technology we need to decarbonise is in place is reassuring. We expect growth in companies which allow us to decarbonise – such as renewable energy and technologies which drive energy efficiency – to deliver strong performance.”

Equally, while the US remains wobbly on renewables, the commitment from most other countries is as strong as ever. The UK still aims to cut emissions by 68% by 2030 compared with 1990 levels, while the EU raised its renewable energy goal to 42.5% in 2023, up from 32% set in 2018**. For the UK and other European nations, these goals are also about energy security at a time when they are increasingly nervous about the reliability of supply from other nations. 

With this in mind, renewable energy remains a fertile area for investors. There are options directly in renewable energy, mostly among investment trusts. This has been a tough place to invest in recent years. The investment trusts now trade at significant discounts to their net asset value and very high yields, but a shift in sentiment has been stubbornly elusive. 

There are signs that the sector may be turning, in spite of the uncertainty surrounding clean energy in the US. Large institutional investors appear to recognise the value inherent in the sector. A Canadian pension fund manager bought out infrastructure group BBGI, while another Canadian heavyweight, Brookfield Asset Management, was looking to buy ‘big listed sustainable energy producers’ after the Trump sell-off in February***. 

The VT Gravis Clean Energy Income fund invests in a range of these trusts and may be a lower-risk way to take advantage of the discounts available. Its largest holding is Greencoat Wind, but it also holds Meridian Energy and Octopus Renewables Infrastructure Trust****. Its sister fund, the VT Gravis Infrastructure Income fund, also holds renewable energy assets, but combines these with more traditional infrastructure investments. Both funds pay an attractive yield and investors are ‘paid to wait’ for any recovery in the value of these assets. 

A lot of the other clean energy or renewables-focused funds have focused on excluding high-emitting companies, or setting a carbon target. However, Deirdre Cooper, manager on the Ninety One Global Environment fund, believes this may be a more problematic approach in the current environment. She says: “With less supportive policy, fewer companies are pushing hard for net zero, and hence a slower pace of decarbonisation – which may make it harder to construct a portfolio of lower carbon assets without substantially restricting the investment universe.”

She adds that in a traditional ‘net zero’ portfolio, “portfolio emissions reductions are often achieved by divesting from high-emission assets or regions. This reduces a portfolio’s carbon footprint on paper, but does nothing to actually lower emissions.” In particular, she says, this approach often means cutting allocations to emerging markets, which limits the availability of capital in regions that need it most to bring about a reduction in emissions. 

Their approach is to look at financing reduced emissions. That includes traditional areas, such as renewable energy, battery storage and energy efficiency technologies, but also financing for companies in high-emitting sectors with credible traditional plans. This might include critical minerals, for example. They also prioritise engagement with companies to encourage progress towards net zero. It believes this is a better approach to creating a real shift in carbon emissions.  

There are other ways into the environmental theme. For example, the Liontrust fund holds Spotify as part of its ‘encouraging sustainable leisure’ theme. Peter Michaelis says: “It also contributes to reducing energy consumption and pollution when compared to records and discs which used energy-intensive hydrocarbon-derived plastics and cause pollution issues at end of life.”

Other environmental themes in the fund include improving the management of water resources. He believes any government impetus to revitalise industrial America could spark an inflection for demand for better water management and should support companies such as Advanced Drainage Systems.

It also holds companies such as Advantest under its “better monitoring of supply chains and quality control” theme. “Advantest provides equipment that tests semiconductors for defects, ensuring that electrical components meet strict safety requirements in markets such as autos, as well as reducing waste in the semiconductor fabrication process.” This can be an alternative route into the environmental theme, without some of the noise that direct renewable energy investment attracts. 

Environmental change remains a major problem and a significant priority for most governments. While there is some backlash against climate commitments, which has affected sentiment towards the sector, this has created opportunities to invest at lower valuations. There are a number of routes into the sector, and it remains a theme with strong long-term drivers. 

*Source: Financial Times, 10 April 2025

**Source: Ember Energy, 15 December 2023

***Source: Financial Times, 12 February 2025

****Source: investor update webinar