Green is the New Black

August 16, 2021 | Jonathan Yung


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Energy Transition & Green Technology

Green technology stocks are publicly traded companies that derive revenues from operations that contribute to a more environmentally sustainable economy. A popular index that tracks these companies is the Wilderhill Clean Energy Index. This index has lost some of its luster after experiencing a drop of 30% between early January and May of 2021. That said, the 220% gain from March 2020 to January 2021 has garnered the attention of many investors. After the most recent pullback in prices, the index’s relative price-to-earnings ratio is the lowest it has been in four years. Although we expect volatility to remain, we believe this represents a good opportunity for those long-term investors, willing to accept volatility and seeking exposure to a secular growth theme.

Governments around the world have displayed a willingness to combat climate change and promote green technology.  Currently, the EU has allocated up to $600 billion for green projects and China has reiterated its commitment to have 20% of its vehicles be EVs by 2025. Moreover, on Biden’s first day in office, the US rejoined the Paris Agreement alongside 194 other states to limit temperature changes related to climate change. According to IRENA, the International Renewable Energy Agency, $110 Trillion will be needed to be invested over the next 30 years to realize a transformation towards green energy. Below is a breakdown of how such capital could be invested.

As global population growth increases the demand for electricity, the greater demand there is for renewable energy. The transition toward renewable energy involves changing how energy is produced, stored, transmitted, and consumed. For energy producers, this transition will lead to continued investments in wind farm operators, wind turbine manufacturers, renewable power utility companies, and solar panel equipment manufacturers. Once produced, the greater need for energy storage should drive investments into battery system operators and battery manufacturers. Next, the transmission and distribution needs will attract capital to benefit power equipment manufacturers and electricity distribution companies. Finally, for some consumers, their tastes are gradually changing to adopt greener technologies and products. For example, there has been a wider acceptance of Electric vehicles which should lead to continued demand for auto parts suppliers and auto manufacturers. Below is a chart that nicely summarizes the sub-industries that stand to benefit from the energy transition.

Investors can see that each stage of production, storage, transmission, and consumption has many industries to potentially invest in. To access green technology investments one may look towards individual stock ownership in companies directly involved in the industries above. That said, these are still considered new technologies and the development and adoption of these technologies will take time. Hence, we expect volatility and consolidation amongst industry players. Therefore, some clients may prefer to employ actively managed mutual funds or passively rebalanced ETFs that specialize in green technologies. There are also hedge funds for accredited investors that add the ability to short companies who are not scoring well on their environmental impact. Before investing, speak to your advisor to determine their suitability for your portfolio.