Learn more about our Clean Energy ETF
Part 1: Introduction to the Clean Energy ETF | ZERO
Part 2: Investors Guide to Clean Energy | Sources of Clean Energy
Part 3: Investment Case for Clean Energy
Part 4: Introducing the HANetf S&P Global Clean Energy Select HANzero™ UCITS ETF
The
fundamental case for investing in clean energy appears particularly robust due
to a combination of policy tailwinds and innovation-driven improvement in
economics relative to competing sources.
When investing in a Clean Energy ETF your capital is at risk.
The Policy Environment
The Paris Agreement is the centre-piece of coordinated global policy to combat climate change. It is a legally binding international treaty with the objective of limiting global warming to well under 2 degrees Celsius compared to pre-industrial levels. The mechanism to achieve limited temperature increase is to reach peak greenhouse gas (“GHG”) emissions as soon as possible and to achieve a carbon neutral world by mid-Century.
The Agreement functions by inviting countries to submit nationally determined contributions (“NDCs”), which communicate the actions each will take toward reaching the goals of the Agreement along with the actions they will take to build resilience against rising temperatures. [1]
The Paris Agreement suffered a massive blow to its efficacy when U.S. President Donald Trump withdrew the United States. The subsequent election of President Biden has breathed new life into global coordination in the fight against climate change, restoring the US to its position of leadership.
In the infancy of his presidency, Biden made an astonishing array of climate-related commitments across international channels and virtually every department of the government that essentially turned the policy of the prior four years on a dime.
The full list of initiatives is beyond the scope of this paper, but a selection is listed below: [2]
- Re-join the Paris Agreement
- Establish a $2 trillion climate-focused infrastructure plan
- Set a target to achieve a net-zero carbon economy by 2050 and a 50% reduction in GHG emissions by 2030
To
achieve these goals, the U.S. will need to dramatically alter the means of
production and consumption across all industries, but the energy sector will need
to be at the centre of these efforts. This is perhaps most clearly represented
by the government’s commitment to create a carbon pollution-free electricity
sector by 2035. While the sources of GHG emissions are broad-based, so much of
the overall solution relies on electrification and de-carbonization of the
energy sector.
And
naturally, the renewed U.S. commitment not in isolation. The European Union has
targeted GHG reductions of 55% by 2030, the UK has committed to a 78% decline
by 2035 (compared to 1990 levels) [3], and China has committed to achieve peak emissions before 2030 and carbon
neutrality before 2060. [4]
We
believe that this renewed consensus around the imperative of combatting climate
change creates a massive tailwind for green energy. Indeed, we have already
witnessed a significant uptick in renewables capacity, and this trend will need
to continue. The U.S. Energy Information Agency forecast renewables to account
for >50% of total power generation by the early 2040s. (U.S. EIA –
International Energy Outlook 2020)
Looking
into the sector on a more granular basis, the main beneficiaries are expected
to be solar and wind power, which are seeing installation at scale at an
incredible pace.
As much as we have emphasized the policy tailwinds that we believe will be instrumental in supporting this extraordinary growth in the green energy space, it is ultimately the economics that will dominate the transition away from fossil fuels. The reality is that the accelerating pace of innovation in wind and solar in particular has made these technologies competitive with or superior to traditional fossil fuels from a cost perspective. The last decade alone (2010-2019) witnessed dramatic cost declines at 82% for solar, 39% for onshore wind and 29% for offshore wind. From a levelized cost of electricity (“LCOE”) perspective, this puts each squarely in or at the low end of the cost range for fossil fuels. There are a number of immense challenges that need to be solved for our economies to draw most of their power from renewables (e.g. intermittency and grid design), but that is an incredible area of opportunity and the economics increasingly speak for themselves [5]
This assertion is evident in the dramatic increase in private investment in renewables. Private investment is materially driven by an expectation of future profitability. We simply do not believe we would be seeing these increased flows unless the fundamental case for renewables was extraordinarily strong.
Critically, this transition is not currently being led by the energy
sector stalwart oil & gas sector. Although we have seen them invest
meaningfully in technologies directly related to fossil fuels production and
consumption such as carbon capture, utilization and storage (“CCUS”), capital
flows into core renewable sub-sectors have been minimal. When it comes to
transformational technologies, purpose-build green energy companies are leading
the charge. [6]
We believe that the
above-referenced factors combine to create an extraordinarily attractive
long-term investment opportunity in the clean energy space. Recent equity performance has been supportive of this
claim, where we have seen massive outperformance of clean energy benchmarks
relative to their traditional counterparts.
Source: Bloomberg as of 01/06/2021
While
there has been some reversal as the “growth trade” clean energy has been swept
up in has partially unwound, we believe the fundamentals remain strong for the
sector.
Learn more about our Clean Energy ETF here