One persistent misconception about “green” investing is that investors must be willing to sacrifice financial returns for some social or environmental benefit. Not only is this notion outdated, but in today’s environment, it could deprive investors of valuable opportunities to include a vital non-correlated asset class to their portfolios.
With recent volatility in the markets compounding investors’ health concerns regarding the coronavirus pandemic, strategies that focus on renewable energy have become increasingly important as risk management tools for clients, thanks to their lack of correlation to equities.
Add in the potential for sustainable, long-term income generation, and the green energy sector is an area that could be newly compelling for many investors.
With that said, the renewable energy space is unfamiliar territory for many investors who are accustomed to a traditional 60 / 40 equity and debt portfolio.
What should these clients — and the advisors who serve them — look for as they explore this asset class? Here are some thoughts to consider:
What to Invest In
Many investors associate green investing with early-stage green technology or other solutions that are still in development.
In fact, the infrastructure side of the renewable energy world — specifically, wind and solar farms — has been producing steady and robust cash flows for years, based on long-term contracts to supply power to utilities, municipalities, 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 offerings never materializes. Suffice it to say, significant risk and volatility are involved.
Solar and wind farms, on the other hand, are durable assets that have some of the same characteristics that make real estate or fixed-income investments attractive 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.