The global advance of the COVID-19 coronavirus has made 2020 an extraordinarily testing year for investors across almost all sectors and geographies. Those seeking some positivity amidst these bleak times might do well to look at green infrastructure: i.e. renewable energy, energy efficiency and the 'circular economy'.

Everywhere we look, the world is going green, from recycling, to organic groceries, to sustainable food production, to – needless to say – green energy. Everyone, it seems, including climate change scientists, businesses, governments and consumers – is interested in diluting the pressures to which the environment is being increasingly subjected. For economies, investment in green infrastructure satisfies several needs: enabling them to meet climate change pledges, and creating large numbers of jobs for example. For consumers, there is a growing body of evidence that investing in cleaner, greener energy sources may provide good returns to a portfolio.

 

A hot topic

In a world increasingly troubled by the effects of climate change, green energy, in all its manifestations, rarely finds itself far from the top of the political and commercial agenda. As a consequence, the generation of power that isn’t reliant on the burning of fossil fuels to generate electricity for domestic or industrial consumption – wind, solar and water being the top three sources – is creating a plethora of investment opportunities as the movement gathers momentum. Take wind power: it's one of the fastest-growing sources of renewable energy, having increased 75-fold over the past two decades; China leads the world with 217 gigawatts (GW) of installed capacity in 2018, followed by the US with 96 GW and Germany with 59 GW. Despite the pandemic-influenced downturn, overall investment in new renewable energy capacity was $132.4bn in the first half of 2020, up 5% from $125.8bn in the same period of 2019[1].

With limited supplies of those fossil fuels and growing concern over their environmental impact, governments across the world have committed to dramatically lowering their CO2 emissions. According to the International Renewable Energy Agency, countries will need to double their annual investment in renewables, to circa $600bn, in order to meet the Paris Agreement target of limiting global warming to within 2 degrees Celsius by 2100. In the UK for example, one of Theresa May's final acts before stepping down as prime minister in 2019 was to enshrine in law a commitment to reach net zero carbon emissions by 2050, making it the first member of the G7 group of industrialised nations to do so. France also proposed net zero emissions legislation last year, while some smaller countries have targeted dates prior to 2050, such as Finland (2035) and Norway (2030), although the latter allows the buying of carbon offsets. For the UK to reach its target, around 135 GW of new wind and solar capacity need to be delivered over the next 30 years, or 4.5 GW each year – according to Aurora Energy Research – which should serve to ensure that infrastructure investment in the sector remains buoyant.

The significant positive effect on the UK economy of increased government support for green infrastructure has also been quantified by recent statistics published in July of this year by RenewableUK; it forecasts  £20 billion of new investments and 12,000 new jobs in the UK as part of the nation’s sustainable economic recovery package. Since the lock-down began on 23rd March, UK-based wind companies have already announced new projects and investments worth more than £4 billion, creating in excess of 2,000 UK jobs, despite a marked shrinkage in the rest of the economy.

 

The outlook for renewables

Renewables are predicted to be the fastest-growing energy source over the next 20 years, with the sector bolstered by the declining cost of wind and solar power. For the first time, in 2018, the cost of generating electricity from offshore wind turbines became cheaper than nuclear energy, having fallen by almost half in the previous two years. In 2007, renewable technologies accounted for 23% of the UK's new power capacity; 10 years later, it was 61%[2].

Many industry commentators see this accelerating demand for alternative sources as signalling a 'new era' for energy, which in turn presents opportunities for investors. It’s a view shared by David Smith, manager of Henderson High Income, an investment trust.

One way in which Henderson High Income Trust has gained exposure to the growth in renewable energy is through investments in the utility sector. This sector was once seen as dull with negligible growth prospects but has seen a renaissance in the last few years.  Recognising the shift towards renewable energy early, some of the companies in the sector started to transition their businesses away from coal and other high carbon emitting energy sources towards onshore and offshore wind, solar and other renewable energy generation such as hydroelectric. The likes of RWE and EDP in continental Europe and SSE in the UK now generate the majority of their profits from renewable energy generation and pay an attractive dividend yield of 2.9%, 4.2% and 6.0% respectively[3]. Each company has plans to continue their transition with large pipelines of new projects to significantly increase their renewable energy capacity over the next five years, with RWE adding 7.7 GW of additional capacity, EDP 5.8 GW and SSE 2.4 GW – growth of 119%, 62% and 88% respectively[4]. This will help underpin profit growth, especially as technologies improve to make renewable energy assets more cost-competitive, supporting future dividend growth from the already attractive yields available. Also, with the three utilities exposure to renewable energy set to increase in the medium term, one could argue that the businesses should be valued more highly given they are becoming more sustainable in the longer term.

As climate change has become an increasingly important issue amongst society, and with governments signed up to agreements to reduce greenhouses gases, significant investment is required in renewable energy generation. The utility sector is well placed to benefit from this structural growth over the long term but also pay attractive dividends in the short term.

Glossary

Dividend yield: expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.

[1] The Guardian/BloombergNEF (BNEF), 13.07.20

[2] Knight Frank: Renewables & UN/BloombergNEF (BNEF), 2018

[3] Bloomberg, 30th September 2020

[4] Credit Suisse, 30th September 2020

 

The above example is intended for illustrative purposes only and is not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. Janus Henderson Investors, one of its affiliated advisors, or its employees, may have a position mentioned in the securities mentioned in the report. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.