SRI: High oil prices make strong case for investing in renewable energy

3rd February 2011

The political instability in Egypt briefly sent the oil price over $100 a barrel. Higher oil prices threaten to be a drain on the economy, but also make a stronger case for renewable energy sources. Government cut-backs have the potential to damage the sector in the short-term, but any sustained rise in the oil price will put the energy issue firmly on the table once again.

This write-up of an FT roundtable is lengthy, but highlights many of the issues for sustainable energy.

It is a controversial area, with many environmentalists disagreeing about the best approach. As this piece in the Guardian demonstrates, there are many commentators who believe that tackling climate change should be a far greater priority:  

Whiten says: "If the climate change issue brushed under the carpet, even temporarily, then the world will be wasting even more of the very valuable time in dealing with the climate change threats and hazards. I myself am totally pro the clean energy, but not at the expense of climate change knowledge and awareness."

In its annual report, Henderson's SRI committee says that the successful companies of 2010 have tended to be involved with the ‘efficiency' theme – this includes companies that are well-placed to deal with greater austerity from governments. Cleaner energy companies, which are more dependent on sustained government support programmes, fared less well.

Nevertheless, Schroders believes that there are still investment opportunities in clean energy. In a recent Talking Point article –  Simon Webber, a global sector specialist and portfolio manager (global and international equities) at the group points to changes in car technology as an example of a clean energy opportunity. He says: "Increasingly aggressive regulation of vehicle emissions and fuel consumption will drive a very rapid deployment of new technologies in the car. New components and systems for improving combustion engine efficiency will be a major growth market in the next five years, driven by mid-decade regulations in the EU and US."

There are signs of real economic momentum being generated by the renewable energy sector. The Scotland Government is currently forecasting an additional 26,000 jobs from the sector over the next decade. This FT article highlights some of the initiatives.  There are also increasingly opportunities in emerging markets(FT).

Business support for clean energy is likely to grow if the higher oil price persists(CNN). Private equity companies are also reported to be taking an increased interest in the sector(NewEnergynewsnetwork). These should act to support valuations.

But for those looking to tap into the growth in clean energy, the sector needs to be negotiated with care. Clean energy companies are prone to hype. Although the sector is maturing, it is still possible to find plenty of examples on the major investment websites of wild claims being made for individual clean energy stocks. This is an exciting sector, but the technologies can be complex and investors need to ensure that they are with the winners.

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