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—double-digit earnings 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% from 2019 to 2022, well above major benchmarks like the S&P 500.
Here’s how we reached this conclusion—and where we see investment opportunities flourishing.
My name is Anastasia Amoroso, Head of Cross Asset Thematic Strategy at J.P. Morgan Private Bank.
Did you know that only 20% of us living in 4,300 cities around the world today breathe clean air that meets environmental standards? The rest of us are breathing in some level of polluted air, which has long been linked to damaging impacts on human health.
Well, now it is increasingly possible to both enjoy modern life and breathe cleaner air. This is because clean or renewable energy, after years of hype and at times disappointment, has finally come of age, and it promises to significantly reduce our reliance on air-polluting fossil fuels.
So why now? Because many forces are finally combining to make clean energy our reality. Specifically, the government push for clean energy and the economics pull of solar and wind technologies are attracting more and more industry, consumer and corporate interest in the adoption of clean energy.
First, speaking of government push, $54 billion of post-COVID fiscal stimulus worldwide is being directed towards green initiatives. But now add on top of it more than $600 billion of green stimulus just recently agreed to by the European Union. This is a significant further push on top of already existing government commitments to renewables.
For example, Europe plans to generate 32% of its electricity from clean energy by 2030. China targets 35% from renewables by the same date. And in the U.S., although there is no official federal target, 29 states have renewable energy commitments by 2030 or before. This government push, it means significant acceleration of clean energy during this decade.
But perhaps even more important than the government push is the pull of attractive economics of clean energy like wind and solar. The cost of solar fell 82% from 2010, while the cost of onshore wind energy declined by 39%. In fact, electricity production using these renewables fell so much that it is now cheaper to build new solar and wind capacity than a new coal plant, and almost as cheap as natural gas. That is a true inflection point. It is not surprising then globally, solar and wind are projected to represent 60% of new capacity as from 2021 to 2025. And in 2019, they already accounted for 72%
In addition to the government push and the favorable economic pull, it is the corporate commitment to sustainability that is driving the adoption of clean energy. For example, more than 200 companies globally, or a quarter of the global Fortune 500 companies, have committed to renewable energy by 2050 or sooner. And one in three of them are already 75% towards their goals.
Interestingly, one-in-two companies say that they’re motivated by cost savings. We think it is the corporate interest in the adoption of clean energy that could be the source of upside surprise to investors.
So the bottom line is this, the forces of government policies, favorable economics and shareholder focus on corporate sustainability are combining to accelerate the push towards renewables. Already this year, clean energy companies significantly outperform [RATA 00:03:27] indices in the first half of 2020. And judging from the substantial projected annual earnings growth of 17% for the next three years, this streak of outperformance may continue.
Of course, there’s still plenty of risk to consider, political headwinds or the fact that renewables are not always 100% green. But for investors who are careful in navigating these risks, this can still mean a wealth of opportunities in both public and private markets. Specifically, companies focusing on various wind and solar technologies, which are enabling this transition to clean energy, they should stand to benefit.
Thank you joining us today. We look forward to speaking with you more on this very important topic of clean energy. It is important to us, both for our financial and personal health.
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Investment Insights Megatrends: Clean Energy.
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A woman with long blonde hair and dark eyes, Anastasia Amoroso.
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Anastasia Amoroso, Head of Cross Asset Thematic Strategy
Ms. Rooney:
My name is Anastasia Amoroso, Head of Cross Asset Thematic Strategy at J.P. Morgan Private Bank. Did you know that only 20% of us living in 4,300 cities around the world today breathe clean air that meets environmental standards? The rest of us are breathing in some level of polluted air, which has long been linked to damaging impacts on human health. Well, now it is increasingly possible to both enjoy modern life and breathe cleaner air. This is because clean or renewable energy, after years of hype and at times disappointment, has finally come of age, and it promises to significantly reduce our reliance on air-polluting fossil fuels.
So why now? Because many forces are finally combining to make clean energy our reality. Specifically, the government push for clean energy and the economics pull of solar and wind technologies are attracting more and more industry, consumer and corporate interest in the adoption of clean energy. First, speaking of government push, $54 billion of post-COVID fiscal stimulus worldwide is being directed towards green initiatives. But now add on top of it more than $600 billion of green stimulus just recently agreed to by the European Union. This is a significant further push on top of already existing government commitments to renewables.
On screen:
A bar chart appears, showing "COVID-19 stimulus packages approved to date are leaning "green," with "Global Green Stimulus Adopted" at 54 billion dollars and "Green Stimulus Passed by European Union in July 2020" at just over 600 billion dollars.
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Source: CNBC, July 21, 2020, and Bloomberg New Energy Finance, July 23, 2020.
Ms. Rooney:
For example, Europe plans to generate 32% of its electricity from clean energy by 2030. China targets 35% from renewables by the same date. And in the U.S., although there is no official federal target, 29 states have renewable energy commitments by 2030 or before. This government push, it means significant acceleration of clean energy during this decade. But perhaps even more important than the government push is the pull of attractive economics of clean energy like wind and solar. The cost of solar fell 82% from 2010, while the cost of onshore wind energy declined by 39%. In fact, electricity production using these renewables fell so much that it is now cheaper to build new solar and wind capacity than a new coal plant, and almost as cheap as natural gas. That is a true inflection point.
On screen:
A line chart appears, labeled "Cost of wind and solar is below coal, converged with natural gas. Dollars per megawatt hour (real 2019.)" The chart shows:
- Solar at just above 350 dollars per megawatt hour in 2010 and decreasing to about 50 dollars per megawatt hour in 2020;
- Onshore wind at just above 100 dollars per megawatt hour in 2010 and decreasing to about 50 dollars per megawatt hour in 2020;
- Offshore wind at just above 200 dollars per megawatt hour in 2010 and decreasing to about 100 dollars per megawatt hour in 2020;
- Natural gas at about 100 dollars per megawatt hour in 2014 and remaining at about 100 dollars per megawatt hour in 2020;
- Coal at about 75 dollars per megawatt hour in 2014 and remaining at about 75 dollars per megawatt hour in 2020.
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1H 2020 LCOE Data Viewer. Bloomberg New Energy Finance. April 28, 2020. LCOE is a levelized cost of energy, the net present value of the unit-cost of electricity over the lifetime of a generating asset. It is often taken as a proxy of the average price that the generating asset must receive in a market to break even over its lifetime.
Ms. Rooney:
It is not surprising then globally, solar and wind are projected to represent 60% of new capacity as from 2021 to 2025. And in 2019, they already accounted for 72% In addition to the government push and the favorable economic pull, it is the corporate commitment to sustainability that is driving the adoption of clean energy. For example, more than 200 companies globally, or a quarter of the global Fortune 500 companies, have committed to renewable energy by 2050 or sooner. And one in three of them are already 75% towards their goals.
Interestingly, one-in-two companies say that they’re motivated by cost savings. We think it is the corporate interest in the adoption of clean energy that could be the source of upside surprise to investors.
So the bottom line is this, the forces of government policies, favorable economics and shareholder focus on corporate sustainability are combining to accelerate the push towards renewables. Already this year, clean energy companies significantly outperform [RATA 00:03:27] indices in the first half of 2020.
On screen:
A bar chart appears, labeled "Government push and favorable economics are combining forces to make clean energy a reality." It shows:
- S&P 500 at 5.78%;
- Nasdaq Computer at 9.96%;
- iShares Global Clean Energy ETF at 16.73%;
- Nasdaq Biotech at 27.23%.
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Source: Bloomberg Finance L.P. As of April 20, 2020. For clean energy, used the average 2019-2022 CAGR excluding stocks that have negative EPS or that EPS wasn't otherwise available.
Ms. Rooney:
And judging from the substantial projected annual earnings growth of 17% for the next three years, this streak of outperformance may continue. Of course, there’s still plenty of risk to consider, political headwinds or the fact that renewables are not always 100% green. But for investors who are careful in navigating these risks, this can still mean a wealth of opportunities in both public and private markets. Specifically, companies focusing on various wind and solar technologies, which are enabling this transition to clean energy, they should stand to benefit.
Thank you joining us today. We look forward to speaking with you more on this very important topic of clean energy. It is important to us, both for our financial and personal health.
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J.P.Morgan Private Bank.
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Anastasia Amoroso, Head of Cross-Asset Thematic Strategy at the Private Bank, explains how it is increasingly more possible to both enjoy modern life and breathe cleaner air.
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 20302. 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 globally3, 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 – ten years after Europe. The nation’s earlier stated 2030 target is 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 then5. 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 2020–2030 (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 U.S. During this time period, the U.S. 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 2021–2025, and accounted for 72% in 20198. 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 20109.
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 demand10, using electricity to power computer equipment as well as 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 savings11. Overall, a quarter of the Fortune Global 500 companies have publicly declared that they are carbon neutral, or will be by 2030, using 100% renewable energy or meeting a science-based reduction target12.
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 industry13. But companies like Facebook, Google, Amazon, Microsoft and Apple14 are moving to clean energy to minimize their current and future carbon footprint. They are either already consuming clean energy for all of the electricity use or have committed to do so by 202515.
- It’s not just the tech giants that are moving to clean energy. Companies like Starbucks, Unilever, DHL, Cisco16 and others are using 100% renewable energy17.
- Even some oil and gas companies are remaking themselves into renewable enterprises. For example, the Norwegian oil and gas company Equinor18 says it plans to become a “global offshore wind major” and intends to increase its renewable assets tenfold by 202619.
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. We anticipate the speed of clean energy adoption could surprise investors to the upside and drive meaningful opportunities for growth.
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 like 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 also are 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 Eciency and Governance, Dec 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, Dec. 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, https://www.irena.org/newsroom/pressreleases/2020/Jun/Renewables-Increasingly-Beat-Even-Cheapest-Coal-Competitors-on-Cost
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 like 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, Dec 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 pursue eorts to limit warming to 1.5°C.
13. https://e360.yale.edu/features/energy-hogs-can-huge-data-centers-be-made-more-ecient 14. Not investment recommendations. This material should not be regarded as investment research or a J.P. Morgan investment research report.
15. Iceland and Nordic countries like Finland and Sweden emerged as attractive destinations for data center clients as these countries lead in the use of renewables for electricity and oer otherwise favorable conditions like cooler temperatures to cool heat-producing data centers.
16. Not investment recommendations. This material should not be regarded as investment research or a J.P. Morgan investment research report.
17. https://www.epa.gov/greenpower/green-power-partnership-national-top-100
18. Not investment recommendations. This material should not be regarded as investment research or a J.P. Morgan investment research report.
19. https://www.equinor.com/en/what-we-do/wind.html
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