Every year, global energy demand continues to rise. Driven by emerging economies and developing nations, total worldwide energy usage is expected to grow by nearly 50% by 2050. At the same time, scientists are sounding the alarms about rising temperature levels, caused by carbon dioxide and other greenhouse gases.
With temperatures likely to increase by well over two degrees Celsius, many nations are seeking ways to replace fossil fuels with renewable sources of energy. This provides a market opportunity for investors looking to profit from green energy investments.
- Climate change represents an existential threat to human civilization, with many nations seeking to reach zero net carbon emissions by 2050.
- As the world transitions away from fossil fuels, there is a market opportunity for companies investing in clean or renewable energy sources.
- Global investment in transitional technologies reached $755 billion in 2021.
- Wind, solar, and hydropower represent promising technologies in the green energy market.
- Investments in renewables will need to triple in the coming years in order to reach net-zero carbon emissions.
Understanding Green Energy Investments
Green energy refers to any technology that can replace fossil fuels with renewable sources, such as solar, wind, or hydroelectric power. It can also refer to auxiliary technologies that will also be important for a green energy transition. For example, improved battery technologies can help transportation networks transition to electric vehicles, and smart grids can help reduce overall consumption.
A new study by Bloomberg New Energy Finance found that global investment in transitional technologies reached $755 billion in 2021. In order to stay on track for reducing net carbon emissions to zero, investment in transitional energy will have to reach over $2 trillion between 2022 and 2025 and about $4.1 trillion from 2026 to 2030.
1.1° - 5.4° C
Climate models predict that global temperatures could rise by 1.1 to 5.4 degrees Celsius by the end of the century, according to the National Oceanic and Atmospheric Administration.
Investment in renewable energy projects soared to new heights in 2021, thanks to new solar and wind power installations. In order to reach net-zero carbon emissions by 2050, BloombergNEF predicts that solar and wind plants will need an average of $1.5 trillion per year between 2026 and 2030.
Emerging markets saw record increases in climate investments, led by the Asia-Pacific region with $368 billion. However, those investments will have to continue growing over the next decades. In order to reach net-zero carbon emissions by 2050, the worldwide investment will have to triple over the next few years.
The bipartisan infrastructure bill signed into law by the Biden Administration in late 2021 makes a $65 billion investment in the research, development, and deployment of cutting-edge clean energy technologies as well as new transmission infrastructure that will connect new renewable and clean energy power sources.
Types of Green Energy Investments
There are several ways to earn profits from green energy prospects. The most direct way is to identify individual companies whose businesses rely on producing alternative energy technologies. However, researching individual companies can be time-consuming and not all such stocks are publicly traded. An easier way might be to identify a mutual fund or index fund with a large basket of green energy securities.
Clean energy funds
Clean energy is a broad umbrella that can include anything from renewables to alternative transportation technologies. Although this may not fit everyone's definition of green energy, clean energy funds offer a convenient way to invest in a broad portfolio of energy companies.
The easiest way to play it is through the Invesco WilderHill Clean Energy ETF (PBW). The $270 million ETF tracks some 124 different green energy firms as of March 2022, including stalwarts like Canadian Solar Inc. (CSIQ) and First Solar, Inc. (FSLR). So far, PBW hasn’t lived up to its promise and the fund has managed to have a 10-year return of just 11.34%. However, the fund is a long-term play and could see higher returns in the future.
Another option could be the iShares Global Clean Energy (ICLN), which only has a little more than 39% of its portfolio in U.S. stocks as of March 2022.
To get the latest analysis and advice on green investing, check out The Green Investor podcast powered by Investopedia.
Solar and wind ETFs
Investors looking for more purely renewable plays might consider some of the funds that focus on solar and wind energy. Both the Invesco Solar ETF (TAN) and First Trust ISE Global Wind Energy ETF (FAN) make adding their respective sectors a breeze.
Cute tickers aside, both the TAN and FAN have been monster winners over the last few years as both solar and wind power makers have once again returned to profitability. The TAN solar ETF saw gains of 61% over the three years ending in December of 2021 and FAN saw gains of around 23% in the same period. With the sun shining and the wind at their backs, renewable energy investments could push fund prices higher over the next few decades.
Hydropower is expected to be the dominant renewable energy source driving spending in the years ahead. Today, it is the most widely-used source of renewable energy production, accounting for about 17% of the world's electricity.
General Electric Co. (GE) re-entered the hydropower business in 2015 with the acquisition of France’s Alstom SA. Alstom is one of the leading producers of hydropower turbines in the world. At present, GE turbines and generators represent around 25% of the world's installed capacity.
Not to be outdone, rival Siemens AG continues to focus on small-scale hydroelectric facilities. Both GE and Siemens could be strong players in the expansion of renewable energy.
How Do You Invest in Green Energy?
The easiest way to invest in green energy is to find a mutual fund or index fund that invests in a wide basket of renewable energy securities. There are many such funds, each managed according to a different strategy or targeting a different renewable energy index.
Alternatively, investors can also research the stocks of individual green energy companies, although this process is more complicated.
Which Countries Invest the Most in Green Energy?
According to a report by the United Nations Environment Program, China was the largest investor in renewable energy in the decade from 2010 to 2019. China spent $758 billion on non-hydroelectric renewable energy, compared to $356 billion from the United States and $202 billion from Japan.
What Is the Best Form of Green Energy?
There is no single answer to this question since the output from renewable energy depends heavily on geographical factors, like the weather. Both solar and wind power have seen drastic improvements in electrical output, and in many locations, they are now cheaper than fossil fuels. Hydroelectric, geothermal, and nuclear power are more reliable for large-scale production, but they each have different environmental drawbacks.
The Bottom Line
Bloomberg New Energy Finance’s recent report shows just how far renewables will go toward our generation's needs. Given the anticipated spending spree in the sector, investors who choose to go green could see their holdings grow along with the demand for energy.