Oil and gas stocks are plunging, while the focus on climate change keeps rising. That’s making financial advisors look to clean-energy investments increasingly for their clients.
“There's definitely a growing demand for low-carbon investing for both ethical and financial reasons,” says Tim Nash, founder and independent investment coach at Good Investing in Toronto.
The task for advisors is to guide investors through a period of major change in energy.
“A lot of investors recognize and want to profit from opportunities in this sector, while hedging their bets against traditional energy companies that might be left behind as we make the transition from fossil fuels,” Mr. Nash says.
He recommends a strategic approach that addresses an investor’s financial goals and minimizes risk.
For example, investors seeking growth might consider companies that develop technologies used to generate renewable energy, such as solar panels, or wind and hydro turbines.
For other investors focused on preserving wealth and drawing income, the way to go might be companies contracted to build and operate clean-energy infrastructure. Examples of such operators include Bermuda-based Brookfield Renewable Partners LP (BEP-UN-T), Innergex Renewable Energy Inc. (INE-T) in Longueuil, Que., and Boralex Inc. (BLX-T) in Kingsey Falls, Que.
“They own the projects and contracts, not the technology. As long as the sun shines, the wind blows or the water flows, they’ll keep getting revenue,” Mr. Nash says. “Many of them also pay investors high dividends.”
Spreading the risk is key, he adds. Investors need to ensure they’re diversified across all technologies instead of putting all their green-energy money into just solar or wind.
Adding some international assets is also smart, Mr. Nash says. Exchange-traded funds (ETFs) can make it easier to gain this global diversification. He points to Invesco Global Clean Energy ETF (PBD-A) as an example of a fund that’s well diversified across technologies and regions.
For investors looking for dividends and global exposure, a possible option is Global X YieldCo & Renewable Energy Income ETF (YLCO-Q). It includes companies such as the power distributor Enel Americas SA (ENIA-N) in Chile and Denmark-based Vestas Wind Systems A/S (VWDRY-OTC-US), which Mr. Nash says is the world’s largest wind-turbine producer.
When searching for green-energy investment opportunities, where should advisors look internationally? Alex McVean, advisor with McVean Wealth at HollisWealth, a division of Investia Financial Services Inc., in Toronto, suggests focusing on countries with environmentally responsible governments.
“Many clean energy businesses rely heavily on government subsidies to grow,” Mr. McVean says. “Investing in a country whose politics could shift away from environmental responsibility could be a threat to these subsidies and the company.”
If advisors are directing clients toward renewable energy ETFs or mutual funds, consider how each underlying stock is weighted, says Darryl Brown, an independent advisor at You&Yours Financial in Toronto.
“Some funds have a high amount of concentration in relatively few firms. So, you end up isolating your investment in this sector to maybe 25 companies, with perhaps a handful from this total representing up to 50 per cent of the fund,” Mr. Brown says. “It may look like a diversified fund, but when you start peeling back, you’ll see the risk is concentrated in just a few stocks.”
Beyond ETFs and mutual funds, he says adding a different asset class is a good way to diversify green-energy investments. Examples of green-energy fixed-income investments include SolarShare Bonds and CoPower Green Bonds.
Although the clean-energy industry has grown rapidly over the past several years, finding individual stocks to add to an investment portfolio can be challenging, Mr. Brown says.
“Research has always been a key part of successful investing, and it’s especially important when you're investing in an industry that’s still taking shape,” he says.
What will a mature clean-energy sector look like? Kurt Sorschak, president and chief executive of Xebec Adsorption Inc. (XBC-X), in Blainville, Que., which provides technology that purifies, generates and filters various gases, expects solar and renewable natural gas to dominate in the future.
Mr. Sorschak says solar’s big advantage is that it’s cheap to produce, However, large-scale storage has always been a problem. One possible game-changer is new technology that converts solar energy to gas that can be stored in pipelines.
“That’s the big play in the future for gas utilities,” Mr. Sorschak says.
For now, Mr. Nash says advisors should make diversification – across technologies, companies and regions – a mantra for clean-energy investing. He recommends allocating no more than 15 per cent of an investor’s portfolio to renewable energy.
“The industry and the technologies are changing so quickly that’s it’s almost impossible to know what’s going to do well,” Mr. Nash says. “I would caution investors not to pick and choose specific technologies, but instead stay diversified as they would with the rest of their portfolio.”