With the climate crisis no longer possible to ignore and the increasing potential to put dollars into clean energy, now might seem like the perfect time to get into the market.
However, investing in clean energy is more loaded than it might appear on the surface, and there are decisions for each individual to make, based on their values, risk tolerance, and investing goals.
If you do decide to invest in clean energy, then the question becomes – what’s the best way to do so? Stocks or ETFs?
Below, I’ll cover the good, the bad, and the ugly of getting into the clean energy market and provide guidance on how to move forward should you decide to invest.
Clean Energy Investing: The Good
The obvious answer here is that by investing in clean energy you get to help fund the companies and projects that are at the forefront of combatting climate change.
Investments in clean energy can run the gamut of wind, solar, hydropower, clean transport, and any other alternative to fossil fuels. By propelling these clean sustainable alternatives to petroleum, we as investors get to feel more involved in the process of shifting to a net-zero future.
As for the potential for financial gains, many analysts are bullish on the opportunity. According to Investopedia, $755 billion was invested in clean energy in 2021. That number should be set to grow, as most countries around the world are setting targets to hit net zero by 2050. The technologies that will fuel (pun intended) the path to hitting those goals mainly rest in the clean energy space.
Clean Energy Investing: The Bad
Don’t let the above information on analyst predictions fool you, investing in clean energy involves putting your money into a volatile market.
While analysts might crunch numbers and make informed predictions, they’re still just predicting and that lends an element of gambling to these investments. These are the same people that advised investing in AOL in 1999. Anyone who followed that advice lost 70% the following year. They also advised against investing in Google in 2004. If you followed that advice, you missed out on 900% growth.
Summary – analysts can’t predict the future any better than you or I.
As a long-term investor, I don’t mess around with predictions. I’d rather look at historical performance as an indicator. The Invesco WilderHill Clean Energy ETF (PBW) is touted as the “easiest” way to get into clean energy by Investopedia.
That’s all well and good that it’s easy, but not when the 10-year historical returns are 11%. Compare that to purchasing SPY (S&P 500 index), where, in just 5 years, investors saw an 88% increase.
Of course, there are other clean energy investment options, but buyer beware, this is a risky investment compared to purchasing broad market funds that cross sectors.
Personally, I own shares of QCLN. My returns have been ok since I got in low, but I purchased the ETF specifically for the sake of diversification – to add mid-cap investments to my portfolio. I don’t own much and I don’t have high expectations that this fund will be the main growth accelerator in my portfolio.
Clean Energy Investing: The Ugly
If you’re reading this blog, I would hazard a guess that combatting climate change is important to you. 73% of the worlds greenhouse gas emissions come from the energy sector and if you want to invest in clean energy, there’s potential you’ll have to get in bed with the enemy.
Major oil companies are not dumb, they see the future, and despite combating shifts towards renewable energy, they are also investing in it.
For example, ICLN, a clean energy ETF formed through a partnership between iShares and Blackrock, is reported to have 20% of its fund in fossil fuels.
On the other hand, QCLN, which I own shares with, has $0 in fossil fuels. So a pure clean energy approach is feasible. Just do your homework
Personally, I see things taking a turn for the better. Last year, when I was looking for a clean energy fund, I was pretty put off when I saw holdings in companies like Enbridge, which operated line 5 through the great lakes. This pipeline was especially controversial given the extreme environmental damage it could cause if it were to leak into the great lakes. Today, as I write this, Enbridge no longer seems to make the cut.
Clean Energy Investing: Should You Do It?
There’s no right answer to this question. It all depends on your overall investing strategy and your values.
I decided to put a small amount of money into clean energy. The decision I made was based on a desire to put cash towards a better future. I believe that the more money that goes into these funds, the more the market will meet the demand for clean energy investment options.
I only put in a small amount because I don’t believe in gaming the market. I’m not going to hold my breath waiting for analyst predictions to come true. I’d rather build the investment into my overall diversification strategy.
I would summarize my decision as – things may not be perfect today, but I won’t wait for perfect.
Best Way to Invest in Clean Energy
This question comes down to whether or not you should buy ETFs or individual stocks. If you follow me on Instagram, you’ll know that I don’t follow a strategy that includes investing in individual stocks.
The main reason is volatility. Individual stocks are much riskier than broad market index funds and make it harder to maintain a more diverse portfolio. They also take more time and effort to research and keep balanced.
I’d rather just own a chunk of the whole stock market.
When it comes to finding a clean energy ETF, you will need to do your research. This list, by ETF database, is a great place to start your research. You don’t need to buy a membership to see the top ten funds by holdings.
I recommend you use the same financial performance analysis you would on any investment, and then include research into the holdings and the carbon footprint of the fund. Two tools that I like are fossilfreefunds.org and the Morningstar Sustainability Rating.
Investing in clean energy provides an incredible opportunity to put your dollars to work for a better future. But the strategy is more complex than it may appear on the surface.
If you’re interested, the bottom line is, do your homework on any investments.