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Asset Management | ESG Edge

Generating Green Alpha

August 2020

"Climate change has become a defining factor in companies' long-term prospects," Larry Fink of Blackrock, wrote in his annual letter to corporate executives. "Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance." For more and more companies, doing the right thing is becoming as much a business imperative as a social responsibility, especially in the market for renewable energy. Renewable energy as an asset class is booming around the world, as wind and solar power plants become more competitive against fossil fuels.

According to Bloomberg, this year's (January 20, YTD) rally in exchange-traded funds specializing in clean energy is leaving larger peers in the environmental, social and governance sector far behind. One example is the USD 1.2 billion Invesco Solar ETF's 75% jump this year, which exceeds the 9% climb in the USD 8.6 billion iShares ESG Aware MSCI USA ETF, the biggest such fund in the ESG space. The S&P Global Clean Energy Index has climbed 41%.

Trillions of public and private dollars are expected to be poured into clean energy projects over the next decade. And while some green sectors are still burdened with an up-and-down history, even energy investors burned by the oil rout are looking at clean technology. Gas and oil stocks are down some 40% this year (calendar year to date). Goldman Sachs Group Inc., projects that spending on renewable power will overtake that of oil and gas drilling next year for the first time. The investment bank sees as much as USD 16 trillion of clean energy opportunities through 2030. Among the reasons; borrowing rates have risen to as high as 20% for hydrocarbon projects compared with as little as 3% for clean energy. In its latest Global Energy Perspective, McKinsey also says that renewable energy will account for over 50% of global electricity generation by 2035.

The US election is seen as a major turning point for green investing and climate action. Democrat presidential nominee, Joe Biden, has pledged to spend USD 2 trillion to combat climate change with an aim of eliminating carbon emissions from the power grid by 2035 and accelerating the uptake of electric vehicles. If this is implemented, companies working in the low carbon energy industry, such as solar and wind power, and firms in the electric vehicle supply chain stand to benefit immensely. According to the Wall Street Journal, "Tax incentives for renewable energy projects such as wind and solar are due to phase out in 2020. Mr. Biden has pledged to extend them and support the acceleration of other projects such as energy efficient buildings."

The WilderHill Clean Energy Index, a compilation of green power companies listed on the U.S. exchanges, surged to a more than nine-year high recently, on the back of the optimism of Joe Biden winning the election. The index has gained more than 33% since the start of July.

Not only stocks from the United States, the world’s largest wind turbine manufacturer, Denmark's Vestas Wind Systems A/S, is also hovering near its record high. In India too, we have seen the stock price of Adani Green energy rise by 146% since the beginning of the calendar year, while the benchmark Nifty 100 index is down 4%.  

With governments and companies around the world moving rapidly toward carbon neutrality, we believe renewable, clean energy stocks will benefit over the long term. The journey has just begun.  

Authored by: Abhay Laijawala, MD and Fund Manager, Avendus Capital Public Markets Alternate Strategies LLP

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