November 16, 2021

What’s Both Cool and Hot? Wind and Solar Power Investments, Allocators Say

Seeing lush future profits, institutions are diligently investing in these two renewable energy sources.

Reported by Larry Light

Art by Scott Bakal

Scores of windmills stretching out to sea and across the plains. Vast columns of panels arrayed under the sun. Wind and solar power are attracting ever greater interest among asset allocators, who look to green investments for both altruistic and capitalistic reasons. It helps that many of these investments have performed well and appear poised to be even more lucrative over time.

To accommodate eager allocators and other investors, numerous exchange-traded funds (ETFs) have cropped up in recent years, offering collections of solar, wind, and other renewable energy companies—and earning good results.

Let’s look at a trio of the top funds that have beaten the S&P 500 in the past half-decade. The market index has returned 21.8% annually over the period, as of Friday. Over the same time, VanEck Vectors Low Carbon Energy was up 46.1%, Invesco Solar rose 43.7%, and iShares Global Clean Energy increased 28.3%.

Investments in wind and solar energy benefit from rosy expectations as planet savers. These industries have expanded enormously, while their costs have shrunk and climate change worries have grown.

Wind and solar are the two fastest-growing sources of renewable energy. In 2020, the largest renewable, wind, provided 8.4% of the electricity in the US and third-place solar produced 2.3%, according to the US Energy Information Administration (EIA). Combined with hydropower (in second place, at 7.3%) and other smaller contributors, renewables constitute one-fifth of the nation’s electricity output.

Fossil fuels make up 60%, and nuclear plants contribute the other 20%. The renewable choices appear to be gaining, and fossil fuels and nuclear are projected to fall behind as a share of power output, at least under many scenarios.

The Biden administration, which seeks to cut carbon emissions in half by 2030, calls for 80% of US power to come from clean sources by then. A debate rages over whether that is doable. Wind and solar’s power generation has increased at a 16.5% annual rate over the past decade, per ClearView Energy Partners.

Even if that admittedly strong pace continues, the wind-solar share would be just 24.8% in eight years, at the beginning of 2030, falling short of President Joe Biden’s goal. So, the adoption of more wind and solar would have to accelerate mightily. (Hydropower, largely dependent on big dam projects, is expanding at a slower speed, 1.6%.)

Allocators’ Green Goals

Seeing a new remunerative asset class arising, institutional investors have clambered into renewable energy investments, with a large concentration on wind and solar, owing to the two energy sources’ speed of expansion. And they expect it will pay off handsomely over the many years it will take to convert to predominantly renewable energy. “This is a multidecade investment opportunity,” said Eric Fogarty, a portfolio manager for clean energy strategy at Duff & Phelps Investment Management.

Global institutional investments in renewable projects, whether direct or through funds, total $12 trillion annually, by the estimate of the International Renewable Energy Agency (IRENA). The bulk of institutional involvement in wind and solar has been via funds, from the likes of BlackRock and Legal & General Investment Management, instead of direct investments.

For instance, the Alaska Permanent Fund Corporation (APFC) in 2017 joined an effort to raise several hundred million dollars from multiple institutions for a sustainable infrastructure company run by Generate Capital that invests in solar, battery storage, and other sustainable initiatives. The Caisse de dépôt et placement du Québec (CDPQ) pension fund has an ongoing program to invest in clean energy and last year channeled $1 billion to support wind and solar firm Invenergy Renewables. In 2017, the California Public Employees’ Retirement System (CalPERS) committed more than $100 million to a clean energy fund.

A number of allocators, notably university endowments, are divesting fossil fuel stocks in favor of renewable energy. Other institutions, however, are in both areas, reasoning that oil, gas, and the like will remain a key part of the world’s energy framework for some time.

“Realistically, today governments need to consider some fossil fuel power and/or nuclear in their power generation mix,” said Marcus Frampton, CIO of the Alaska sovereign wealth fund (assets: $79.7 billion), which has kept oil and gas investments. At the same time, he pointed out, “We do have actually a lot of renewables investments in our infrastructure portfolio.” Namely about a quarter of the fund’s $3 billion infra position.

Where to Invest

Although they may indeed be the dominant energy providers of the future, wind and solar can be cyclical investments. Despite their good five-year track records, the three ETFs mentioned above, and renewable energy stocks overall, are off in 2021. While the S&P 500 has climbed 24.7% this year, the Van Eck ETF is up just 5.4%, while the Invesco one is down 3%, and the iShares fund has dipped 10.7%.

Reason for their blah 2021 showing: The prospect of rising bond yields, which are no friend of tech-oriented plays like these, and a delay in congressional passage of the Biden administration’s $1.75 trillion social spending bill, which includes tax incentives for solar and wind buildouts.

Congress’ recently passed $1.2 trillion infrastructure measure contains funding to upgrade the aging US electrical grid, which is not directly targeted at boosting wind and solar—although down the line the legislation’s enactment will aid renewables as well as all other energy sources.

Chinese firms make up the bulk of solar power gear and a lot of wind equipment, but these businesses are not always green pure plays. Example: China Suntien Green Energy, which has done handsomely, is up 43% annually over the past five years. Aside from it solar and wind components, though, this Hong Kong-listed company also has a heavy concentration in natural gas.

In the West, the top wind power operators are utilities, which are seldom investor favorites: NextEra Energy (the stock has risen by 26% annually over five years, as of Friday), Xcel Energy (13%), and MidAmerican Energy, which is a unit of Warren Buffett’s Berkshire Hathaway and thus not traded separately. Lately, oil and gas companies are running wind projects, too.

Leading non-Chinese wind equipment makers—meaning turbines, blades, and towers—also show good returns, for the most part. Denmark’s Vestas is up 24% annually over the past five years and is expanding its reach. “They have onshore turbines and will go offshore in the future,” said Ben Bielawski, a Duff & Phelps portfolio manager.

Michel Sznajer, portfolio manager at sustainable investment firm Ecofin, projected that NextEra “will double its renewable capacity over the next five years.” One reason, he said, is that it has economies of scale. “They have wind and solar farms, and sell to other utilities, as well as corporations,” he said.

NextEra, which owns utilities Florida Power & Light and Gulf Power, also has vast fields of solar panels and individual assemblies on homes’ rooftops. But it is far from the largest solar company. That honor belongs to China’s JinkoSolar Holding (traded in the US, the stock has logged 36% per annum over five years), followed by Canadian Solar (28%). At third is the US’s First Solar, ahead 29% over the period.

Stocks aren’t the only way to invest in wind and solar. Aegon Asset Management has invested in asset-backed securities (ABS), which package loans to buy solar equipment and leases for it. With yields from 2% to 3%, these securities benefit from low delinquency rates: 1%, on par with credit cards, by JPMorgan’s data. In all, $8 billion in solar ABS have been issued since the asset class’ debut in 2013.

Helping these securities is the declining price of solar panels, noted Jim Baskin, Aegon’s head of US structured research. “Renewables are the perfect asset class” for securitizing, he added, due to their prospects and sound fundamentals.

Carbon Apocalypse

On the political front, a lot of attention is given to the urgency of doing something about climate change sooner rather than later.

“We don’t have much more than 10 years,” Biden said earlier this month, while on a tour of places that wildfires have devastated. “Disasters aren’t going to stop. That’s the nature of the climate threat. But we know what we have to do. We just need to summon the courage and the creativity to do it.”

Under the Trump administration, support for clean energy was almost nonexistent. At the same time, federal tax incentives for wind and solar stayed in place. “They will be extended,” said Elizabeth Levy, portfolio manager at Trillium Asset Management. True, government backing hasn’t been consistent worldwide—look at the haggling at the Glasgow COP26 conference. Still, she observed, “The outlook is positive for renewables because we know there needs to be a climate transition.” And regardless of what Washington is doing, many states have long backed wind and solar initiatives. California, for example, requires all new homes be solar-equipped.

Of course, not everyone buys the renewable imperative. Bjorn Lomborg, president of the Copenhagen Consensus Center think tank, argues that predictions of carbon-driven global doom are vastly exaggerated and that green solutions very often are expensive boondoggles. Faddish campaigns to end fossil fuels will harm the world’s poorer nations, which depend on those energy sources to grow economically, he contends.

Lower carbon alternatives, presumably natural gas, are more affordable and effective than “inefficient solar and wind,” he wrote in a recent Wall Street Journal op-ed. Regardless of whether one accepts this thesis, there’s ample evidence that fossil fuel usage might not be severely diminished in the next decade or so, the goal of many environmentalists and governments.

But what is even more clear is that wind and solar are on the march as investments. True, technological hurdles do remain, chiefly how to store sufficient power from these sources for when the wind doesn’t blow and the sun doesn’t shine. But the engineering advances made by wind and solar in recent years suggest their quest to harness nature should win out in the end.