Pros and Cons of Investing in Renewable Energy
A wind power technician works on an offshore turbine. Photo credit: Monty Rakusen / Image Source / Getty Images
The future of the American energy sector isn’t a coal miner with soot on their nose. It’s a wind turbine technician hoisted hundreds of feet above ocean waves, greasing rotor blades.
By 2050, renewable resources are expected to comprise 42% of the U.S. energy mix, according to a recent report issued by the U.S. Energy Information Administration (EIA), the statistical data division of the U.S. Department of Energy. That’s double the amount of renewable resources that powered the American grid in 2020, the agency stated, adding that most of that additional generation capacity is expected to come from new wind farms and solar assets.
That’s in part because as the climate crisis continues to worsen, state and federal officials are increasingly looking toward renewable resources to power homes and businesses around the country. But what differentiates renewable energy from non-renewable energy?
Non-renewable energy comes from resources of which the planet only has a finite amount to share, such as carbon-based fuels like coal, natural gas or oil which cannot necessarily be harvested in any corner of the world.
Conversely, generating renewable energy utilizes resources that are theoretically infinite, like the sun, winds, or tidal waves. Renewable energy can also include biomass, hydropower and geothermal. That same EIA report predicted that the use of coal to generate electricity will continue to fall in the next three decades, while natural gas for electricity generation will comprise around one-third of the country’s power production over that same time period.
More and more renewable energy projects are being proposed to state and federal regulators by developers keen to partake in — and make money on — the renewable energy revolution. One notable project recently approved by federal regulators includes the 800 MW Vineyard Wind 1 farm off the coast of Massachusetts, which CNBC reports will provide enough electricity for the grid to power 400,000 homes and businesses across New England once construction wraps up in 2023.
Investing in Renewable Energy
Sound like something you want to put your dollars toward? If so, you’re definitely not alone. Renewable energy investments have enjoyed increasing popularity in recent years, in part because finance professionals on the whole have developed a stronger understanding of the sector, according to Trenton Allen, the managing director and chief executive officer of Sustainable Capital Advisors, based in Washington, DC.
However, Allen also thinks that growing interest in these types of investments stems from recognition of the deepening and widely noticeable near-term effects of the climate crisis on society and the resulting climate consumerism it has engendered.
“The intensity of actual climate-related events is widespread throughout the country, throughout the world,” said Allen. “When you see the 400-year floods happening twice a year, when you see droughts, when you see wildfires, those things are in people’s minds, the images are there. And people look to figure out what they can do.”
Investors of all kinds — whether they be a professional or an individual selecting stocks for their own portfolio — are considering environmental, social and governance (ESG) factors when they seek new assets in which to invest or consider whether to sell off, or divest, from what they already have. In fact, 85% of investors in 2020 said that they considered ESG principles when selecting investments, according to a fact sheet published by Gartner, a technology research and consulting company, in June 2021.
The goals of ESG investing are fairly straightforward: an interested ESG investor considers whether a potential investment will support a project, company or industry that is environmentally conscious, socially responsible and whose managers consistently adhere to a code of ethical and transparent rules.
However, while renewable energy investments often spring to mind for those interested in selecting environmentally conscious assets, renewable energy and ESG aren’t necessarily synonymous. That’s because while renewable energy may reduce carbon or other greenhouse gas emissions, there are many ways that a renewable energy resource, project or company may not be environmentally friendly. For instance, building large-scale hydroelectric facilities, which produce power that doesn’t directly emit greenhouse gases, may require flooding land or damming rivers, which harms wildlife and human communities. It may also necessitate construction activities that emit greenhouse gases, like tree and vegetation clearing.
Another example of renewable energy projects not necessarily adhering to ESG principles could include certain types of solar panel installations. Some rural or semi-rural communities in the U.S. have protested and lamented the installation of large-scale solar panel installations in their towns that take up vast amounts of open space. While such projects help to mitigate the amount of greenhouse gases tied to electricity production, they sometimes are not considered to be socially responsible in the eyes of the communities that host them.
“Despite the fact that people use them interchangeably within our language — whether it’s ‘ESG,’ or ‘climate friendly’ or ‘socially responsible,’ — at the end of the day, these are terms that have many different definitions,” explained Allen.
The important thing for an investor potentially interested in renewable energy projects, Allen said, is to “always go back to thinking about what it is that you’re trying to achieve” and to “be mindful of that goal in regards to the dollars that you’re looking to deploy, then try to align that with the companies and other financial products that exist.” Speak with a certified financial advisor to better understand whether certain financial products, such as mutual funds and individual stocks, are appropriate for your financial situation.
“Are you trying to achieve a greater environmental impact for your dollars? If you are, then make sure the products you’re selecting are aligned with that,” Allen said. “If you’re thinking about a company that you’re [interested in] investing in but you don’t really care whether [the investment is] reducing carbon emissions or any other type of emissions, you just want them to be more socially minded, that’s something that you should think about” ahead of time.
Benefits of Investing in Renewable Energy
One benefit of investing in renewable energy companies or developments is that most of the projects involve long-term infrastructure build-outs and essential services, like utilities, Allen said. Many companies that operate renewable energy facilities use long-term power purchase agreements, and thus might not see the same “booms or busts” that other industries may see year over year, he explained.
Additionally, increasing numbers of state and local governments, in addition to the federal government, are setting goals and mandates related to the amount of renewable energy that powers their residents’ homes in the coming decades. That means that there will be a steady stream of potential renewable power developments in which many companies can become involved — and that investors will benefit from.
For example, some states, such as Maine, have required that the entirety of their electricity demand be fulfilled by renewable energy by 2050, according to a National Conference of State Legislatures web page. As of 2020, just under 80% of the New England state’s electricity net generation came from renewable energy sources, including hydroelectric power, per an EIA state energy profile, meaning that the state government will need to support new renewable energy facilities necessary to reach the state’s target.
That regulatory certainty should be appealing to investors thinking about the ‘upside of the market,’ or the potential value, Allen said. Taking a “balanced approach” between riskier investments gives the potential investor “the ability to sort of think through [balancing] a portfolio based upon different regulatory and market needs, and then also thinking about how this is done based on geography and other types of concerns for these particular projects.”
Because of regulations and requirements to encourage renewable energy development, there may be local, state or federal subsidies, tax credits or financial incentives for developers, Allen suggested. That may mean a larger return on the investment for the company developing a project, meaning potentially more money for investors. Keep in mind the different subsidies and incentives that different jurisdictions may offer similar companies in different geographic areas and how that could impact their overall financial returns.
Further, investing in renewable energy doesn’t necessarily mean only investing in solar, wind or geothermal. The supply chains for these projects and their developers are massive and complex, meaning there are many different companies that an individual investor could consider that would support the widespread adoption of renewable energy.
Cons of Investing in Renewable Energy
According to Allen, there are institutional “barriers to entry” that make it harder for individual retail investors to invest directly in a renewable energy project unless they are an accredited investor, meaning they can trade securities that aren’t registered with certain government financial oversight agencies, or have a retail broker who can process an investment or trade for them.
“So the question becomes, how do you then get participation [in these types of investments] from investors who don’t have relationships with retail brokers, who may not be considered accredited investors?” Allen said. “And so having sort of a greater variety of who gets to participate and how they do it, I think that is incredibly important in expanding sort of opportunities, particularly in the finance space.”
Another problem can be locating and digesting correct, comprehensive and unbiased information about potential renewable energy investments, Allen said. Frequent misuses and mix-ups of terms that aren’t actually synonyms doesn’t help alleviate confusion, but there are also many considerations within ESG that don’t necessarily complement the others. That’s to say, a particular project may have some beneficial traits, but those same traits might be harmful to another environmental, social or governance factor.
“It does become the job of the investor to sort of ferret through all of that, which is in some respects a little unfair,” Allen said. “So part of it is trying to find trusted sources of information [that potential investors can use] to educate themselves.”
Alyssa Stankiewicz, a lead sustainability analyst at Morningstar Manager Research, agreed that there isn’t much easily accessible entry-level investment research or advice. She added that because the disclosures that U.S. companies have to file aren’t completely standardized, individual investors might not have the “time and resources that they can dedicate to that due diligence.”
However, she said, the information that is available around renewable energy projects is stronger than what is available for the socially conscious and governance angles of ESG.
“One other factor that I think is driving the surge in popularity for climate funds — and that’s maybe harder to nail down or quantify — but the data around climate impacts, while it’s not as strong as traditional financial data, is much stronger than the data that’s available for themes such as diversity, equity and inclusion,” she said. “And so in that way, I think it’s a bit more feasible [to make climate-minded investments] given what’s available to investors to come up with a [financial] product that can rightfully claim to be targeting” the factors that a potential investor cares about.
Further, even though recent polling from the Pew Research Center shows that a majority of Americans are somewhat or very concerned that climate change will personally harm them in their lifetimes, there are many high-profile examples of residents of areas being considered for renewable energy projects that oppose the development for any number of reasons. That opposition can sink a project.
For example, a controversial power transmission project — a type of infrastructure crucial for carrying electricity from where its being generated to where there is greater demand, like city centers — that has been partially constructed in western Maine has since been forced to stop its planed build-out after voters rejected the project through a ballot measure in November 2020. The developer is challenging the constitutionality of the referendum, but nevertheless the project is stalled despite receiving its permits.
Before investing, think about the different potential problems that might arise with a particular renewable energy project or with a company working on certain types of renewable projects, Allen suggests.
“Renewable energy is not a monolith,” he said. “The types of investments and opportunities, and the risk associated with them, are different based upon the types of projects and installations being done.” Further, he added, “a project that is done on a local YMCA within a city like Philadelphia, doesn’t have the same issues related to [transmitting the generated power], but they may have different issues, and so there are different risks that need to be evaluated.”
Bridget is a freelance reporter and newsletter writer based in the Washington, DC, area. She primarily writes about energy, conservation and the environment. Originally from Philadelphia, she graduated from Emerson College in 2016 with a degree in journalism and a minor in environmental studies. When she isn’t working on a story, she’s normally on a northern Maine lake or traveling abroad to practice speaking Spanish.