New climate change investment is positioned to gain more traction with investors
With Earth Day coming up this weekend, clients may be requesting more investment options to mitigate climate change. One small, growing area that advisors can consider is renewable energy infrastructure, which promises risk-adjusted returns that can outpace the market.
“There’s more interest in renewable energy infrastructure than there’s ever been,” Michael Cerasoli, a portfolio manager of energy infrastructure strategies at Eagle Global Advisors, told Wealth Professional.
“But, I think the point where people will truly recognize renewable energy infrastructure as an investment option is when the banks dedicate analysts to covering this by itself, so these companies don’t get lumped into utilities or alternative renewable energy, but are judged on their own merits.”
Cerasoli, who has monitored this area for a decade, expects this investment area’s mainlining will take some time because most companies in this field are either private or part of the bigger utilities.
“That’s one of the reasons why our fund is focused globally,” he said. “In order to get a proper universe, we had to include the European countries, which are far ahead in energy transition, relative to the U.S. We also included Canada because it has a handful of companies focused on this.”
Cerasoli noted several Canadian companies are proponents of renewable energy infrastructure. They include Northland Power, a Toronto-based power producer that owns and operates clean and green power infrastructure assets globally, and TransAlta Corp., a Calgary-based electricity power generator that is slowly closing its coal plants and is investing heavily in its growing renewable energy infrastructure. The companies also include Boralex Inc., a Quebec-founded power company that builds and operates renewable energy facilities in Canada and internationally, and Innergex Renewable Energy, Hydro-Quebec’s developer of North American and international hydroelectric facilities, wind energy, and solar farms.
He noted that investors have traditionally bought renewable infrastructure stocks through solar, battery, or even Tesla-like companies. But those tend to offer “very highly volatile, very risky investments” since their manufacturing orders can dry up in an economic downturn.
Eagle Global Advisors invest in energy infrastructure that traditionally deals with oil and natural gas pipeline and storage companies. But, it began considering renewable infrastructure companies- wind farms, solar fields, and hydro plants - in 2014 after Cerasoli realized their businesses overlapped with long-term contracts, stable cash flows, and healthy dividend yields. Eagle launched its renewable infrastructure ETF, which includes most developed countries with an emphasis on Europe and North America, last December. Canadian advisors can access the fund, which now has $2.5 million in assets and offers a 3.5% return that promises to cushion investors’ funds during market downturns.
Cerasoli says this industry is on the cusp of growth since the costs of renewable energy, especially wind and solar, now are not much much expensive than fossil fuels. On a dollar per megawatt hour basis, it is cheaper than many forms of fossil fuels.
“Environmentally, we like it because renewable energy doesn’t have carbon emissions,” he said. “This is also the direction technology is going - cleaner and greener - over the next several decades.
“But, when you’re building a portfolio over the long-term, you want some debt and some equity, and, within the equity, you want some stability. Then you want a smaller slice of the pie being more aggressive and growth-oriented. If you think about that slice of the pie that is equity focused, focused on stocks and a little bit more conservative, but pays a yield that you can get income from, this kind of investment would fit into that. Instead of investing in an electric utility, you could invest in renewable energy infrastructure because the utilities are getting into it. But it also has a multi-decade growth profile based on public policy initiatives. The idea is that Main Street wants this and Wall Street wants this, so that’s where the puck is going.”