What the push for clean energy means for investors


Companies in the clean energy sector are poised to benefit from rising demand for renewable energy as governments worldwide work toward Paris climate targets, with the momentum building after the US recently re-committed to the agreement.

2020 tied for the hottest year on record, matching 2016, NASA has found. Continuing the planet's long-term warming trend, the year's globally averaged temperature was 1.02 degrees Celsius warmer than the baseline 1951-1980 mean, according to scientists at NASA's Goddard Institute for Space Studies (GISS).

Rising temperatures are causing phenomena such as loss of ice sheet mass, rising sea levels and longer and more intense heat waves, with which Australians are well accustomed. Understanding such long-term climate trends is essential for the safety and quality of human life, as is reducing greenhouse gas (GHG) emissions and sourcing more energy from renewable sources rather than fossil fuels to limit global warming.

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As most of the scientific community agree, global temperatures are increasing due to human activities, specifically GHG emissions, like carbon dioxide and methane.

Most GHG emissions result from carbon dioxide, or 81% in 2018. That's what makes the Paris climate agreement so important, as it aims to cap the rise in global average temperature to below 2 degrees Celcius above pre-industrial levels and to cut GHG emissions.

In order to reach the goal of the Paris agreement, countries that have signed the agreement (close to 200) are required to set goals for their climate efforts every five years, increasing their level of ambition over time, something with which Australia is lagging.

Highlighting the global move to clean energy, the US Energy Information Administration (EIA) forecasts that power generation coming from renewable sources, such as wind, solar, hydro, and geothermal, should provide almost half of the world's electricity generation by 2050. This move to clean energy is being driven by governments adopting renewable energy policies to meet the Paris climate agreement.

Importantly, US President Joe Biden has re-committed the US to the Paris agreement, which will add significantly to global clean energy momentum. Biden has promised to spend US$2 trillion on clean energy projects over the next four years.

Another big GHG emitter, China, is leading global renewable energy production. It is the world's largest producer of wind and solar energy, and the largest investor in renewable energy. Elsewhere around the globe, money is pouring into renewable energy projects.

However, much more investment in clean energy production, equipment and technology is still required to meet the Paris agreement. According to the International Renewable Energy Agency (IRENA), meeting international climate objectives will require a massive re-allocation of capital toward low-carbon technologies and renewable energy, "and the mobilisation of all available capital sources".

IRENA has stated that annual investment in the renewables space must jump almost threefold to US$800 billion between 2020 and 2050 and the pace must accelerate considerably for the world to meet climate goals.

With the surge in demand for renewable energy, companies in the clean energy space are poised for similar growth, according to index provider S&P Dow Jones Indices (S&PDJI). S&PDJI offers the S&P Global Clean Energy Index, which provides liquid and tradable exposure to 30 leading clean energy companies from around the world.

The index aims to represent the full clean energy ecosystem by including companies from both the energy production and the technology and equipment sides in the various segments of renewable energy across the globe. That includes biofuel energy, ethanol and alcohol fuel production, hydro electricity production, solar and wind energy production.

As momentum builds for renewable energy, investors are also demanding investment products that facilitate a lower carbon future.

Already, companies in the clean energy sector have benefited. The S&P Global Clean Energy Index has delivered a one-year total return of 116.0% as of January 29, 2021. According to S&P, much of the growth in renewable energy consumption through to 2050 will primarily be from non-OECD countries. Therefore, having a global investment perspective is important.

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Arian Neiron is managing director and head of Asia Pacific at VanEck. Prior to joining VanEck, Arian was a partner at boutique asset management advisory firm Sunstone Partners and was previously at Perpetual Investments, Credit Suisse and MLC.