Renewable energy stocks have soared higher this year. Just look at the performance of stocks such as Sunrun Inc. and SolarEdge Technologies Inc. Year-to-date, these stocks are up around 300% and 200% respectively. Not only have they smashed the market, but they have also comfortably outperformed tech winners such as Amazon, Apple, and Facebook.
So, what’s behind the extraordinary rise in renewable energy stocks? And what’s the best way for investors to capitalise on the growth story?
Powerful industry growth
One reason that renewable energy stocks are outperforming right now is that the renewable energy industry is growing at a rapid pace. As a result of the increasing focus on climate change and sustainability, demand for renewable solutions is sky-high.
Today, renewable energy sources make up around 25% of the world’s electricity. However, the International Energy Agency (IEA) sees renewable energy generating capacity growing to around 30% by 2024 under its base-case scenario, driven by cost reductions and advances in digital technologies. Faster growth could be possible if governments put the right policies and financial incentives in place. The IEA sees the brightest future for solar, believing that this technology will power the majority of that growth.
“This is a pivotal time for renewable energy,” said the IEA’s Executive Director, Fatih Birol last year.“Technologies such as solar photovoltaics and wind are at the heart of transformations taking place across the global energy system. Their increasing deployment is crucial for efforts to tackle greenhouse gas emissions, reduce air pollution, and expand energy access.”
Interest in sustainable investing
Another reason that renewable energy stocks are surging higher is that interest in sustainable investing, or socially responsible investing (SRI), is growing exponentially at present.
In the US, $20.9 billion flowed into sustainable funds in the first half of 2020, according to Morningstar. That was just short of the total 2019 sustainable inflows of $21.4 billion.
It was a similar story in Europe, with European sustainable funds attracting record inflows of €54.6 billion in the second quarter of 2020. That was more than double the inflows registered in the first quarter of the year.
Once a niche area of finance, sustainable investing has become a mainstream investment strategy. Renewable energy stocks are benefitting.
Biden’s green energy plan
A third reason that renewable energy stocks have outperformed in 2020 is that a Biden win in the US election could potentially put a rocket under the sector.
One of the pillars of a Biden administration would be climate policy. Biden understands that climate change is a crucial issue for the world and for this reason, he has developed a climate policy called Clean Energy Revolution. This will involve spending nearly $2 trillion over the next 10 years on renewable energy, on top of commitments from local states and the private sector. The goal is to ensure that the US achieves a 100% clean energy economy and net-zero emissions by 2050.
If Biden wins the election, companies that offer solutions that can advance the US towards a 100% clean energy economy will benefit. That would mean a boost to solar, wind, waste management and recycling, and water efficiency businesses.
Net-zero carbon cities
Finally, investors are also focusing on the fact that across the world, many major cities are committing to becoming net-zero carbon cities in the not-too-distant future. This is increasing the demand for green energy technologies.
Already, more than 100 cities worldwide have pledged to become carbon neutral by 2050 including the likes of Copenhagen, London, Melbourne, Oslo, and Vancouver. Each city is approaching the goal in a different way. London, for example, is aiming to reduce the number of trips made by car every day. Autonomous vehicles and shared ownership schemes could play a key role here. Vancouver, meanwhile, is prioritising the construction of zero-emission buildings.
By 2050, roughly three quarters of the global population will live in cities, accounting for approximately 80% of total energy demand and 70% of global greenhouse gas emissions. So, the need for cities to move away from fossil fuels is paramount.
How to invest in renewable stocks
For investors, the renewable energy sector represents a compelling long-term opportunity. In all likelihood, the transition to renewable energy is likely to be a focus for governments for decades. According to BloombergNEF, between 2019 and 2050, more than $13 trillion could be invested in the renewable energy industry. Meanwhile, between now and 2027, the global renewable power generation market is expected to grow at a compound annual growth rate (CAGR) of about 8%.
In terms of renewable energy stocks, there is no shortage of options for investors. Whether you want to invest in a solar energy business, a wind power business, or a hydrogen energy company, there are plenty of publicly listed companies.
It is important to understand, however, that not all companies are likely to capture the full opportunity. As with any emerging industry, some companies will be winners, while others will be left behind. Some technologies will simply not prove to be commercially viable. Smaller, niche companies can run into all kinds of problems, particularly if they are reliant on third parties for funding.
It is also worth pointing out that renewable energy stocks can be highly volatile, with huge price swings occurring in a short period of time. If smaller companies experience challenges, their value can decline significantly.
What all of this means is that the best way to gain exposure to the renewable energy theme is to invest in a diversified portfolio of stocks in order to spread your risk. By investing in a basket of renewable energy stocks, you can potentially capitalise on the upside that the theme offers, while minimising your downside risk.
To help investors gain exposure to the renewable energy theme, eToro has developed a CopyPortfolio that is focused specifically on renewable energy stocks. This portfolio provides investors with exposure to a wide range of public companies that are focused on solar energy, wind, waste, recycling, wood fibre, electrical infrastructure, battery charging, and clean transportation. You can find out more about eToro’s RenewableEnergy CopyPortfolio here.
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