Investing in renewables: four criteria and three risks to watch out for

The energy transition, as well as guiding the new life horizon of developed countries – starting with Europe which has chosen to be the leader of this new paradigm – is an important piece of the entire ESG movement, that is, of that attention to environmental sustainability, social and governance that characterizes the new relationships between businesses, consumers and investors. In this context, renewable technologies, and their potential to reduce carbon emissions, have often been characterized by false hopes. Especially after the opening of new coal power plants in many emerging countries (which contradicts the efforts of the most “virtuous” countries today, but which have used non-renewable energy sources liberally in the past), the penetration of electric vehicles is stagnant in Europe and the United States, global CO2 emissions increased by 1.1% in 2023, and global warming exceeded 1.5 degrees Celsius in 2023, for the first time in an entire year.

However, a recent analysis developed by Comgest suggests looking at the acceleration that renewable energy has had in the last five years.

In 2023, an estimated 507GW of renewable electric capacity was added, equal to 2.5 times the amount added in 2019. Spending on electric vehicles is also increasing, with 13.5 million electric vehicles sold in 2023, compared to just 2 million in 2019.

One of the main reasons for the acceleration is that the technology, costs and capacity are now within reach after many years of industrial development. Solar and wind energy can generate electricity at a lower cost than thermal energy, and their prices continue to fall. Today, electricity production from renewable sources can be economically competitive without subsidies.

In this context, even the retail investor can have solid reasons to insist on sustainability choices, even on the financial horizon.

FOUR CHOICE FACTORS

There are multiple approaches to ESG investing. Depending on the values ​​you cultivate and the expectations you harbor. The decision, in any case, is personal. In summary, here are four choice factors that can guide ESG-related investments

1. Exclusion. Investors or managers choose to exclude and not invest in specific companies, sectors or industries. These exclusions usually have an environmental, social, ethical or religious basis. For example, companies or even entire sectors that produce weapons, alcohol or carry out carbon-intensive activities could be excluded.

2. Inclusion. Investors or managers choose to invest in specific companies, sectors or industries based on ESG considerations. Inclusions typically target sectors, issues and companies that invest in communities, have exemplary records on equality and diversity in the workplace, are committed to green technology or clean energy, work to minimize environmental risks or have excellent working and governance practices.

3. Integration. Investors or managers consider ESG criteria in addition to more conventional economic factors. Integration is the most common and flexible approach to ESG investing. ESG integration can occur at any stage of the investment process, including the selection of countries, sectors, themes and individual securities.

4. Impact. Investors or managers invest to generate positive, lasting and significant environmental, social or governance impacts. Impact investing aims to transform or support change across a broad range of sectors, including green technology and clean energy, health and sanitation, access to clean water, climate change resilience and technologies with low or zero carbon footprint.

THREE CONCERNS

However, there are also some negative considerations that must be taken into account. As with any other investment strategy, there are some pitfalls to think about.

At least three “alerts”.

1. Potentially high fees. If you choose an actively managed ESG mutual fund or ETF, you may find yourself paying more than you think in terms of fees.

2. Excess concentration. If you engage in more restrictive ESG investing, you may find yourself limiting your investment options and potentially having an overly concentrated portfolio with higher risk.

3. Choosing the wrong ESG style. As investors choose ESG investments for different and personal reasons, it is important to ensure that you choose an ESG strategy or fund that reflects your values ​​and long-term investment objectives.