Becoming a Clean Energy Investor: Why It Might Be a Good Addition to Your Portfolio
Renewable energy can reduce volatility and increase returns for your portfolio. Consider why we need more of these assets in our energy mix and your wallet.
What is covered in this article:
Investors are interested and motivated to include renewables
Renewable energy is considered by many to be the way of the future, but are we ready to invest in green energy projects and companies with our own money? As the world’s population grows and traditional sources of fuel like coal, oil, and natural gas may become restricted or scarce, we must invest in alternative sources of energy.
A new Morningstar study recently found that there’s high interest among Americans in investing in sustainable energy sources. Specifically, 72% of adults surveyed are at least moderately interested in sustainable investing while 21% of those polled showed a high interest. Let’s take a look at why people are ready to financially back green energy.
Environmental Impact: Green energy leads to a greener world
Renewable energy – energy derived from sources that are naturally replenished like wind, solar, and water - is better for the environment because no greenhouse gases are emitted during energy production. Greenhouse gases are gases that become trapped in the atmosphere, which then trap heat and cause global warming.
When we look at the full life cycle for green energy projects, from raw material procurement to manufacturing to installment and years of power production, the amount of greenhouse gas emissions is close to zero.
On the other hand, using fossil fuels to create energy is the single largest source of greenhouse gas emissions in the US. Specifically, the EPA recently stated that ~75% of the US’s CO2 emissions come from traditional fuel combustion.
Climate change is an increasingly important issue – we see the effects as wildfires rage and coastal areas flood. There is a limited amount of time to combat global warming before the effects are permanent. Pew Research Center found that 67% of Americans don’t believe the government is doing enough to reduce the effects of global climate change. Investing in renewable energy is a way for us to combat climate change and not wait for others to fix the problem for us.
Diversification: Don't put all your eggs in one basket
Today, the US relies heavily on fossil fuels for its energy needs. According to the US Energy Information Administration, roughly 80% of the US’s energy consumption is sourced from petroleum, natural gas, and coal.
The lack of an even split between fossil fuels and other sources of energy puts the security of our energy supply at risk. Allocating energy generation more equitably across varied sources would better protect the US’s energy supply against natural disasters, trade and shipping disruptions, and other unforeseen events.
Renewable energy sources – biomass, wind, hydroelectric, solar, and geothermal - only account for 11% of consumption. We’re not taking advantage of the many options comprising the renewable energy segment to make our supply chain more diverse. It is critical to start making more investments in clean energy today to be prepared in the future on a local and global basis.
This lack of diversification into renewables is likely also reflected within your own portfolio. You likely hold investments directly in traditional oil and gas companies through the most common ETFs or mutual funds. If you invest in a variety of other industries, such as chemical production or even construction, you are in some manner investing in oil and gas. Diversifying into renewables like solar and wind production is one way to mitigate this risk.
Financial Gain: Make some green while investing in green
Investing in clean energy can be good not only for the environment but also for your bank account. A study conducted by the International Energy Agency and Imperial College Business School’s Centre for Climate and Investment reviewed the performance of renewable power and fossil fuel portfolios in the US over 5-year and 10-year periods.
Over 10 years, renewable energy outperformed fossil fuel, generating returns of 192.3% compared to 97.2%. In the past 5 years, the renewable energy investment continued to yield higher returns in addition to being less volatile than the fossil fuel portfolio.
The study was recently updated to include how the pandemic has affected the sector. From January to April 2020, the renewable power portfolio outperformed not only the fossil fuel portfolio but also the S&P 500. Adding financial products that invest in renewable energy to your portfolio provides benefits to both your investments and the environment.
Investing in renewable energy is a way to improve your future
While the idea of consumers directly investing in renewable energy is still gaining traction in the US, more green energy investment options continue to become available to the general public. These new clean investment options will hopefully continue to allow investors to choose clean options for their financial portfolio.
Investing directly in clean energy projects and companies has already gained popularity in Europe – in addition to having more options for investment funds, investors are able to more easily find opportunities to directly finance new solar or wind installations.
In the US, according to a recent study conducted by the Pew Research Center, 77% of Americans believe that the US should be prioritizing the development of renewables over increasing the production of fossil fuels. As this majority becomes more vocal, we hope that new opportunities to finance renewables will become available for consumer investors. Be part of the change and become an investor in renewables today.
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