One persistent misconception about “green” investing is that investors must be willing to sacrifice financial returns forsome social or environmental benefit.Not only is this notion outdated, but intoday’s environment, it could depriveinvestors of valuable opportunities toinclude a vital non-correlated asset classto their portfolios.
With recent volatility in the marketscompounding investors’ health concernsregarding the coronavirus pandemic,strategies that focus on renewable energyhave become increasingly important asrisk management tools for clients, thanksto their lack of correlation to equities.
Add in the potential for sustainable,long-term income generation, and thegreen energy sector is an area that couldbe newly compelling for many investors.
With that said, the renewable energyspace is unfamiliar territory for manyinvestors who are accustomed to a traditional 60 / 40 equity and debt portfolio.What should these clients — and theadvisors who serve them — look for asthey explore this asset class?
Here are some thoughts to consider:
WHAT TO INVEST IN
Many investors associate green investing with early-stage green technology orother solutions that are still in development. In fact, the infrastructure side ofthe renewable energy world — specifically, wind and solar farms — has beenproducing steady and robust cash flowsfor years, based on long-term contractsto supply power to utilities, municipali-ties, corporations and other entities.
Green technology, by contrast, often
involves speculative investments in
unproven approaches that, even in the
best-case scenario, face a long road ahead
before they might achieve significant
adoption. Though such innovations may
generate a lot of buzz, the barriers to
entry in the energy industry are steep, and
even promising green tech companies
can find that the market for their offer-
ings never materializes. Suffice it to say,
significant risk and volatility are involved.
Solar and wind farms, on the otherhand, are durable assets that have someof the same characteristics that makereal estate or fixed-income investmentsattractive in asset-protection strategies.Namely, long-term income and resistance to equity market volatility.
WHEN TO INVEST
Even though green energy infrastructure tends to be less risky and volatile,it’s not without uncertainty.
The first two-to-four years of a typical renewable infrastructure project’s lifecycle is the development phase, whichincludes site selection, permitting, engineering and design, power contracts andfinancing. Many of these elements arewithin a developer’s control, but many arenot, such as town council votes on permits.
A less risky approach is to investin green energy infrastructure afterdevelopment is completed, and theproject has moved into construction.Some risks remain after this point, butthey primarily center on the possibilitythat construction won’t finish, which ismostly within the builder’s control andcan be mitigated.
WHAT HAPPENS AFTER INVESTINGThe availability of any power-producingasset is the ratio of time within a givenperiod that it’s able to generate power.This is a measure of the asset’s abilityto fulfill its power supply contract and akey driver of its ability to produce ongoing income and value for investors.
The question for investors is whetherthe maintenance of the project they’reconsidering is in good hands. Does theinvestment firm that owns the asset,for example, have in-house engineeringexpertise that can optimize operationsto maximize availability? If not, how willit limit downtime? Every idle minute isincome left on the table.
MANAGING CORRELATION WHILE
MAKING A POSITIVE IMPACT
The bottom line: Green power infrastructure investments can fulfill a similar role in an investor’s portfolio to thatof real estate, reducing correlation tothe equity markets and mitigating risk.By knowing what to look for, investorscan protect their portfolios and potentially bring some peace of mind to theirfinancial outlook.
Robert Sher is co-Founder of GreenbackerCapital, an investment firm focused on thesustainable infrastructure sector.
By Robert Sher
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