Clean energy investments set to prosper from long-term trend

29th July 2011

The sum pouring into this sector is rising as pundits say investing in renewable energy might be a good long-term plan as the fact is our reliance on fossil fuels can't last forever. Renewable energy sources are less likely to run out and also have environmental benefits.

James Vaccaro, managing director of Triodos Renewables, says the UK is at a crossroads at which choices need to be made that will decide where our energy comes from in the future.

Investors need to be mindful of the convergence of climate change, energy security issues and the need for a transition to a safe and sustainable energy future – alongside the chance to make a real difference, he says.

Mindful Money blogger Seb Beloe, head of SRI research at Henderson, talked about fossil fuels and their effect on the world's stock exchanges in a recent blog post.

He warns that the next big bubble may be made of carbon and says the growing carbon intensity of the FTSE – and the assumption that all of this fossil fuel will be used – represents a real risk for investors.

"Investors in passive funds are unlikely to be aware of these increased risks – partly because the very companies that hold these carbon risks are not required to disclose them," he says.

Justin Modray of Candid Money says clean energy investments should generally prosper. However, investors need to be in it for the long-term to take advantage of the trends at play.

"Clean energy investment performance is heavily influenced by the oil price in the shorter term – if the oil price is high then clean energy is attractive and vice versa if it's low. Until oil supply starts to dry up, or we're all compelled to use significantly more clean energy, it's hard to see this changing," he explains.

"Yes, over time we'll almost certainly be compelled to use more clean energy, but with a probable timescale of 10-20 years or more there'll be little short term change."

Investors that want to invest in renewable energy funds rather than individual shares have a few to choose from – including ETFs that track a global index of clean energy companies.

But Patrick Connolly from independent financial adviser (IFA) Chase de Vere says that while there is the potential for strong returns from specialist renewable energy projects, they must be considered as high risk. "They're not suitable for the vast majority of investors," he says, "They should only be considered by those who already have a significant and diversified investment portfolio in place and are prepared to accept the risks involved."

What about geothermal?

Geothermal energy is another option for environmentally-conscious investors. This basically involves digging a deep hole in the ground to get to a hot spot in the Earth, then pumping in water. When the resulting steam returns to the surface, it spins a turbine or goes to a heat exchanger.

The Motley Fool says the best stock for this may be Ormat Technologies, a company firmly established in the geothermal space.

What about water?

Alternatively, investors can invest in water. According to investment boutique SAM the global water industry is worth more than $480 billion a year and is projected to grow by 6.2% a year for the near future.

Water is a bigger issue than energy (oil) and food shortages or indeed climate change, according to independent research body EIRIS.

Increasingly, companies are seeking to invest millions in water management projects.

Leon Kaye says in the Guardian: "Water is the new carbon. Many companies have succeeded with the implementation of their energy efficiency and carbon management programmes. But now they are starting to confront water issues within their internal operations and supply chains. Beyond gaining high marks within their sustainability reports, water stewardship can reap a return on investment for firms."

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