The role of renewables in your investment portfolio

With a visibly changing climate, where might you fit renewables in your investment portfolio? Well, the odds are that you already have an allocation to renewable stocks, thanks firstly to the way large fossil fuel companies are changing with the science, and secondly to the rise of a new breed of energy companies.

Climate Focus

Increasingly weird weather over the last few years has sharpened the focus on our changing climate.

In the UK, four of the five hottest days on record have come this decade. Seven of the top ten hottest days have occurred since 2000[1]. In April and May 2023, scientists and meteorologists recorded the highest sea surface temperatures since 1850[2].

Amidst floods and fires, perhaps most worrying of all is a new report authored by more than 50 scientists[3]. It shows the planet has already moved beyond seven of eight key thresholds required to protect life on earth.

Climate change and renewables

The United Nations is at the forefront of measuring climate change – and corralling responses to it[4].

One way to reduce the impact of greenhouse gas emissions and high levels of carbon dioxide is to use alternative energy sources instead. As the UN points out, renewables:

• can provide better energy security, by reducing the need for imports
• are cheaper in many parts of the world, with the cost of solar falling 85% between 2010 and 2020
• do not degrade air quality, in the way many fossil fuels can
• create jobs at a faster rate than the fossil fuel industry

Renewables in the energy mix

In the UK at least, there’s almost a 50/50 chance that you are already powering your home or business[5].

At the end of March this year, renewable energy generation had reached a record share of 48% of total generation. The lion’s share of this comes from offshore wind, accounting for 19% of the total.

Looking at capacity to generate, rather than generation itself, offshore wind represents some 57% of the UK renewables mix, dwarfing onshore wind, solar and biomass put together. So this 48% share might rise further.

Renewables in your portfolio: from brown to green

And if you use renewables at home – there’s every possibility there will be renewables in your investment portfolio

For passive fund investors, renewables come in two forms.

The first is fossil fuel companies that are transitioning to net zero. Take Shell, currently the second largest company in the FTSE100 by market capitalisation[6].

Shell aims to become a net-zero emissions energy business by 2050. By the end of 2022, it had already reduced carbon emissions from its operations by 30% compared with 2016[7].

It’s doing this partly through renewables. For example, in 2022, Shell acquired solar plants in India, Italy, Spain and the UK – and started production at new solar facilities in Australia and the Netherlands[8].

The company also describes offshore wind as “a key growth area”, boasting 2.2 gigawatts of offshore wind capacity in operation and under construction[9]. That’s enough to power nearly 2 million homes[10].

BP is another example. The FTSE’s fifth biggest firm directly emitted some 48.4 million tonnes of CO2 back in 2018, while indirect emissions added another 46 million. Now those numbers are down to 30 million in both cases[11].

Again, renewables play a major part. BP currently has around 5.8 gigawatts in renewable energy generating capacity. It expects to dial this up to 20GW by 2025, and 50GW by 2050[12].

Renewables in your portfolio: already green

The second option is the shares of renewable energy companies that are listed on the major indices tracked by our funds.

SSE, Greencoat UK Wind, ITM Power, Ceres Power Holdings and AFC Energy are all large enough to be listed on the main London Stock Exchange. Of course, given the way investment indices work – and the way passive funds track them – I can’t guarantee they’re in your portfolio as I type.

But they’re good examples of the new breed of investable renewables shares.

Take the FTSE100-listed SSE, formerly Scottish and Southern Energy. It aims to, “create value for shareholders and society in a sustainable way by developing, building, operating and investing in the electricity infrastructure and businesses needed in the transition to net zero.”[13]

On a price basis, had you bought its shares five years ago, at 1265p, you’d be looking at a reasonable rise to 1591p[14]. A dividend of, most recently 67.7p, boosts that price return considerably[15].

Of course, buying a basket of shares over single stocks is a far better way of diversifying your risks and returns – as all the evidence shows – but SSE’s journey is perhaps emblematic of the role already played by renewables in your investment portfolio.

And, as transitioning firms move from brown to green, the chances are renewables will become a bigger and more material component of your future investment returns.

[1] https://www.metoffice.gov.uk/about-us/press-office/news/weather-and-climate/2022/record-high-temperatures-verified

[2] https://blog.metoffice.gov.uk/2023/06/16/sea-surface-temperatures-breaking-records/#:~:text=May%202023%20has%20seen%20nominally,the%20climate%20system%20on%20top.

[3] https://www.nature.com/articles/s41586-023-06083-8#Sec3

[4] All data in this section sourced from  https://www.un.org/en/climatechange/raising-ambition/renewable-energy

[5] All data in this section sourced from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1166002/Energy_Trends_June_2023.pdf

[6] https://www.londonstockexchange.com/indices/ftse-100/constituents/table

[7] https://reports.shell.com/sustainability-report/2022/

[8] https://reports.shell.com/sustainability-report/2022/achieving-net-zero-emissions/providing-lower-carbon-electricity/solar.html

[9] https://www.shell.com/energy-and-innovation/new-energies/wind.html#vanity-aHR0cHM6Ly93d3cuc2hlbGwuY29tL3dpbmQuaHRtbA

[10] One GW can power 876,000 homes if they use a typical 10,000kWh of electricity per year, see  https://www.carboncollective.co/sustainable-investing/gigawatt-gw#how-much-power-does-1-gw-produce?

[11] See p.4 of  https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/sustainability/group-reports/bp-esg-datasheet-2022.pdf

[12] See p.38 of https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/sustainability/group-reports/bp-sustainability-report-2022.pdf

[13] https://www.londonstockexchange.com/stock/SSE/sse-plc/our-story

[14] https://www.londonstockexchange.com/stock/SSE/sse-plc/company-page

[15] https://www.sse.com/investors/shareholder-services/dividends-and-scrip-scheme/timetables-and-reference-price/

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.