With threats of energy rationing and potential blackouts across the UK this winter, it’s hard to ignore the importance of energy security.
Renewable energy is one of the fastest growing segments within the infrastructure market. It has the potential to provide stable returns and a measurable positive impact. By investing in energy infrastructure, investors can support the development of society, and minimise risks of energy scarcity.
But it’s important to understand the areas where investment is most needed. The International Energy Agency (IEA) has shown that there can be no new fossil fuel projects if the world is to stay within the 1.5°C limit on global warming. This need to pivot to cleaner energy provides a big investment opportunity, as 80% of global energy is generated with fossil fuels.
The IEA’s latest World Energy Outlook outlines how Russia’s’ invasion of Ukraine and the subsequent global energy crisis can be a historic turning point towards a cleaner and more secure future. Based on today’s policies, the study shows global demand for every fossil fuel is approaching a peak or plateau. Coal use is expected to decline within the next few years, natural gas to plateau by the end of the decade, and oil by the mid-2030s.
This is positive news, but it relies on governments around the world meeting the ambition set out by their existing policies.
The research also shows there’s not much of a link between the soaring energy prices we’re seeing and climate policies and net-zero commitments. In fact, regions with higher shares of renewables typically had lower electricity prices.
What about nuclear?
Nuclear has been contested by lots of responsible investors. With many still feeling the effects from Chernobyl and Fukushima, the potential devastation from this type of energy could leave lots of investors feeling nervous.
Nuclear power generation is highly resource-intensive, requiring large amounts of water. And the potential for improper management and disposal of radioactive waste presents a significant threat to human health for thousands of years.
However divisive this topic, it’s generally agreed that nuclear will play a key part in transitioning away from fossil fuels.
Over the past 50 years, the use of nuclear power has reduced carbon dioxide emissions by over 60 gigatons – nearly two years’ worth of global energy-related emissions. And nuclear offers a stable source of energy, compared to wind and solar that rely on the wind blowing and sun shining.
The EU is set to introduce nuclear energy along with natural gas to the taxonomy in January 2023. This is a classification system, establishing a list of environmentally sustainable economic activities. Therefore, from next year nuclear will be formally earmarked as a sustainable investment.
What do investment managers think?
Wealth managers with a forward-looking view are considering where there could be demand for alternative energy sources in the future. A recent thematic investing report by HanETF found that nine out of ten of wealth managers would increase their allocation to clean energy over the next 12 months. Just under 90% had recently invested in nuclear energy and uranium-focused funds.
There are several clean-energy Exchange Traded Funds (ETFs) available on our website that offer a diverse range of opportunities to access the market.
This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. All investments and any income then produce can rise and fall in value, so you could get back less than you invest.
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Clean energy and thematic investing – what to consider
Selecting certain companies to represent a theme like clean energy is often referred to as thematic investing. If a theme plays out as expected, the share prices of individual businesses capturing that trend tend to go up. But the opposite is also true.
The performance of thematic investments can be driven by the growth and momentum in the theme, rather than wider market movements. The problem with momentum trading is that a trend could be short-lived. Excitement for a new technology or theme can often be temporary.
Investors should consider the underlying holdings within a thematic investment and whether it truly represents what they’re looking to achieve. We think investors who want to invest in a specialist area should make sure it only forms a small portion of a diversified portfolio.
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Our ETF research is for investors who understand the risks of investing and that investing in ETF’s isn’t right for everyone. Investors should only invest if the ETF’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of an ETF before they invest, and make sure any new investment forms part of a diversified portfolio.