Sustainable Investing
It’s a new age of clean energy
For investors, that means a wealth of opportunities as government push and good economics pull us into a renewable future.
Bottom line
We think the combined economic pull of, and government push for, clean energy will ultimately deliver to investors a welcome surprise to the upside—strong growth for companies that are able to contribute to, and capitalize on, the clean energy value chain. Already, forecasts expect the earnings of global clean energy to grow 17% (FactSet, June 2020) from 2019 to 2022, well above major benchmarks such as the S&P 500.
Here’s how we reached this conclusion—and where we see investment opportunities flourishing.
The European Union is committed to becoming carbon neutral by 2050. The EU target is to reach at least 32% of energy consumption from renewables by 2030.2 Indeed, Europe’s transition to renewables and batteries is said to present a $2.6 trillion investment opportunity—with wind capturing 60% and solar 28% of the total.
China, the largest electricity market globally,3 is expected to transition to renewables more slowly; however, in a major development, the country most recently committed to hit peak emissions before 2030 and to become carbon neutral by 2060—10 years after Europe. The nation’s earlier stated 2030 target was for 20%4 of its electricity consumption to come from non-fossil-fuel energy; forecasts project China will make it to 41% renewable electricity generation by then.5 China is expected to see a 2.5-fold growth in wind in electricity generation by 2027 and a threefold increase in solar photovoltaic (PV) power by that same year.
The United States is on an even slower pace. Renewables6 make up 20% of the electricity mix today and should rise to 28% by 2030. U.S. adoption is currently being driven by 29 states’ policies and goals. Wind and solar electricity generation are each projected to grow 1.5-fold each from 2020 to 2030 (see Figure 1).
The line graph shows the percentage share of renewables in total electricity generation, historically from 2012, and forecast through 2048 in the three regions: European Union, China and United States During this time period, the United States is shown to lag the European Union and China.
Economics pull
Also speeding the worldwide shift to renewables is the pull of increasingly favorable economics. The costs of wind and solar technologies fell substantially due to large-scale capacity expansions and technological improvements. Since 2010, utility-scale solar PV power has shown the sharpest cost decline at 82%, while onshore wind costs declined at 39% and offshore wind dropped 29%.7
It is already more cost-effective to build new energy capacity with PV or wind than with coal. Little surprise then that, globally, solar and wind are expected to be 60% of new capacity adds from 2021 to 2025, and they accounted for 72% in 2019.8 But there’s more: Very soon, new solar and onshore wind power could cost less than keeping many existing coal plants in operation (see Figure 2).
The line graph shows the different LCOE or levelized cost of energy benchmarks from these sources: solar, offshore wind, onshore wind, natural gas and coal. Data is shown from the second half of 2009 to the first half of 2020. During this period, renewables—consisting of solar and wind energy—declined much more dramatically than natural gas or coal. Solar energy LCOE declined by 82%, onshore wind by 39%, and offshore wind by 29%.
Battery technology for energy storage is expected to be key to addressing the intermittent nature of renewable generation, and its cost, too, is falling. The cost of battery packs has decreased 84% since 2010.9
Commercial customers
Add investors’ increasing focus on sustainability to the regulatory push/economic pull driving adoption of renewables—and we expect commercial customers to become significant consumers of clean energy.
Commercial customers currently account for 37% of U.S. electricity demand,10 using electricity to power computer equipment as well as to cool, heat and light buildings. Globally, more than 200 companies representing 228 Terawatt-hours (TWh) have committed to the RE100, an initiative to get companies to achieve 100% renewable electricity by 2050 or sooner. Already, one in three companies are 75% toward their goals; one in two are motivated by cost savings.11 Overall, a quarter of the Fortune Global 500 companies have publicly declared they are carbon neutral, or will be by 2030, using 100% renewable energy or meeting a science-based reduction target.12
Here are some notable examples of how companies have begun to respond with renewable energy commitments:
- Data centers backing up many of our cloud-based online activities now consume more than 2% of the world’s electricity and emit roughly as much CO2 as the airline industry.13 But companies such as Facebook, Google, Amazon, Microsoft and Apple14 are moving to clean energy to minimize their current and future carbon footprints. They are either already consuming clean energy for all of the electricity use or have committed to do so by 2025.15
- It’s not just the tech giants that are moving to clean energy. Companies such as Starbucks, Unilever, DHL, Cisco14 and others are using 100% renewable energy.16
- Even some oil and gas companies are remaking themselves into renewable enterprises. For example, the Norwegian oil and gas company Equinor14 says it plans to become a “global offshore wind major” and intends to increase its renewable assets tenfold by 2026.17
Investor prospects
The shift to renewables has been heralded for years but only now are many forces combining to make that our reality. Industry and corporate commitments to clean energy are clearly on the rise. The adoption of clean energy across countries and industries has the potential to drive meaningful opportunities for growth, and could surprise investors to the upside.
We see four major areas of opportunity for investors in public and private markets:
- Utilities that supply renewable energy and can earn an attractive rate of return.
- Yield companies that buy and lease renewable assets, then pass through the cash flow through dividend yield.
- Solar and wind technologies that lead to efficiency and cost improvements, and benefit from rising new installations.
- Digitization technologies such as asset performance managers for smart grid and the “Internet of Things” to manage electricity loads and optimal delivery.
Other opportunities stand out in carbon credits, renewable energy credits (REC) and green bonds.
But, fair warning, the picture for investments in renewables is not unblemished. In addition to the challenge of finding the right companies to invest in, there are also such general risks as:
- China’s hold on rare earths used in many methods of harvesting renewable energy
- The U.S.’s shifting political winds changing policy toward and away from renewables
- The fact that renewables are not always unequivocally green, as the manufacturing process for some clean energy technologies produces potentially harmful waste
1. “New Energy Outlook 2019,” Bloomberg New Energy Finance, June 2019.
2. European Commission Renewable Energy, Energy Efficiency and Governance, December 4, 2018.
3. In China, economic growth is projected to drive the country’s electricity consumption by 76% by 2042 (compared with a mere 0.4% annual electricity demand growth rate in OECD economies through 2050).
4. “13th Renewable Energy Development Five Year Plan,” National Energy Administration of China, December 10, 2016.
5. “New Energy Outlook 2019,” Bloomberg New Energy Finance, June 2019.
6. Hydro, geothermal, biomass, onshore/offshore wind, utility-scale and small-scale PV.
7. IRENA, Renewables Increasingly Beat Even Cheapest Coal Competitors on Cost Tweet, June 2020.
8. Of course, not all future adds will be in renewables. Many industrial applications still require the higher energy content of conventional oil, gas and fossil fuels, so they will still remain the primary energy source for industries such as glass, bulk chemical, and iron and steel even to 2050. Combined-cycle gas turbines and gas-peaking plants will also still have a key role to play in providing backup and dispatchable electricity.
9. The cost of battery storage in 2019 was $186/kWh. It is projected to fall further to $94/kWh by 2024 and $62/kWh by 2030. Source: Bloomberg New Energy Finance, June 2019.
10. EPA, EIA, Electricity data browser, December 2017.
11. RE100 Progress and Insights, December 2019.
12. “Deed Not Words,” Natural Capital Partners, September 2019. Targets adopted by companies to reduce emissions are considered “science-based” if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement—to limit global warming to well below 2°C above pre-industrial levels, and to pursue efforts to limit warming to 1.5°C.
13. Yale University, "Energy Hogs: Can World’s Huge Data Centers Be Made More Efficient?," April 2018.
14. All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.
15. Iceland and Nordic countries such as Finland and Sweden emerged as attractive destinations for data center clients, as these countries lead in the use of renewables for electricity and other otherwise favorable conditions such as cooler temperatures to cool heat-producing data centers.
16. United States Environmental Protection Agency, Green Power Partnership National Top 100, April 2020.
17. Equinor, "We’re determined to be a global offshore wind energy major. Here’s how," 2020.
Related & Recommended
We take a global approach to sustainable investing, and the solutions offered through our Sustainable Investing Platform meet our internally defined criteria for a sustainable investment. Though we consider our internal criteria to be very thorough and selective, the evolving nature of sustainable finance regulations and the development of jurisdiction-specific legislation setting out the regulatory criteria for a “sustainable investment” mean that there is likely to be, in the future, a degree of divergence as to the regulatory meaning of a “sustainable investment.” In particular, in the European Union, the Sustainable Finance Disclosure Regulation (EU) (2019/2088) (“SFDR”) prescribes certain criteria for a product to be classified as “sustainable” or having a “sustainable investment objective.” For further information on our products that promote environmental and/or social characteristics or that have a sustainable investment objective within the meaning of Article 8 and/or 9 of the SFDR, please see our SFDR Art 8 and 9 Product Disclosures, available at: link.
