Investment Case for Clean Energy

Learn more about our Clean Energy ETF

Part 1:Introduction to the Clean Energy ETF | ZERO

Part 2:Investors Guide to Clean Energy | Sources of Clean Energy

Part 3: Investment Case for Clean Energy

Part 4: Introducing the HANetf S&P Global Clean Energy Select HANzero™ UCITS ETF

The fundamental case for investing in clean energy appears particularly robust due to a combination of policy tailwinds and innovation-driven improvement in economics relative to competing sources.

When investing in a Clean Energy ETF your capital is at risk.

The Policy Environment

The Paris Agreement is the centre-piece of coordinated global policy to combat climate change. It is a legally binding international treaty with the objective of limiting global warming to well under 2 degrees Celsius compared to pre-industrial levels. The mechanism to achieve limited temperature increase is to reach peak greenhouse gas (“GHG”) emissions as soon as possible and to achieve a carbon neutral world by mid-Century.

The Agreement functions by inviting countries to submit nationally determined contributions (“NDCs”) which communicate the actions each will take toward reaching the goals of the Agreement along with the actions they will take to build resilience against rising temperatures. [1]

The Paris Agreement suffered a massive blow to its efficacy when U.S. President Donald Trump withdrew the United States. The subsequent election of President Biden has breathed new life into global coordination in the fight against climate change restoring the US to its position of leadership.

In the infancy of his presidency Biden made an astonishing array of climate-related commitments across international channels and virtually every department of the government that essentially turned the policy of the prior four years on a dime.

The full list of initiatives is beyond the scope of this paper but a selection is listed below: [2]

  • Re-join the Paris Agreement
  • Establish a $2 trillion climate-focused infrastructure plan
  • Set a target to achieve a net-zero carbon economy by 2050 and a 50% reduction in GHG emissions by 2030

To achieve these goals the U.S. will need to dramatically alter the means of production and consumption across all industries but the energy sector will need to be at the centre of these efforts. This is perhaps most clearly represented by the government’s commitment to create a carbon pollution-free electricity sector by 2035. While the sources of GHG emissions are broad-based so much of the overall solution relies on electrification and de-carbonization of the energy sector.

And naturally the renewed U.S. commitment not in isolation. The European Union has targeted GHG reductions of 55% by 2030 the UK has committed to a 78% decline by 2035 (compared to 1990 levels) [3] and China has committed to achieve peak emissions before 2030 and carbon neutrality before 2060. [4]

We believe that this renewed consensus around the imperative of combatting climate change creates a massive tailwind for green energy. Indeed we have already witnessed a significant uptick in renewables capacity and this trend will need to continue. The U.S. Energy Information Agency forecast renewables to account for >50% of total power generation by the early 2040s. (U.S. EIA – International Energy Outlook 2020)

Looking into the sector on a more granular basis the main beneficiaries are expected to be solar and wind power which are seeing installation at scale at an incredible pace.

As much as we have emphasized the policy tailwinds that we believe will be instrumental in supporting this extraordinary growth in the green energy space it is ultimately the economics that will dominate the transition away from fossil fuels. The reality is that the accelerating pace of innovation in wind and solar in particular has made these technologies competitive with or superior to traditional fossil fuels from a cost perspective. The last decade alone (2010-2019) witnessed dramatic cost declines at 82% for solar 39% for onshore wind and 29% for offshore wind. From a levelized cost of electricity (“LCOE”) perspective this puts each squarely in or at the low end of the cost range for fossil fuels. There are a number of immense challenges that need to be solved for our economies to draw most of their power from renewables (e.g. intermittency and grid design) but that is an incredible area of opportunity and the economics increasingly speak for themselves [5]

This assertion is evident in the dramatic increase in private investment in renewables. Private investment is materially driven by an expectation of future profitability. We simply do not believe we would be seeing these increased flows unless the fundamental case for renewables was extraordinarily strong.

Critically this transition is not currently being led by the energy sector stalwart oil & gas sector. Although we have seen them invest meaningfully in technologies directly related to fossil fuels production and consumption such as carbon capture utilization and storage (“CCUS”) capital flows into core renewable sub-sectors have been minimal. When it comes to transformational technologies purpose-build green energy companies are leading the charge. [6]

We believe that the above-referenced factors combine to create an extraordinarily attractive long-term investment opportunity in the clean energy space. Recent equity performance has been supportive of this claim where we have seen massive outperformance of clean energy benchmarks relative to their traditional counterparts.

Source: Bloomberg as of 01/06/2021

While there has been some reversal as the “growth trade” clean energy has been swept up in has partially unwound we believe the fundamentals remain strong for the sector.

Learn more about our Clean Energy ETF here

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