Renewable energy investment trusts

I’ve been monitoring a number of Investment Trusts providing renewable energy for a while but haven’t yet invested in any. The ITs have continued to have a pretty large premium of 10%+, rarely reducing and I haven't been agile enough (or paying enough attention) to catch the infrequent dips. There are also quite a few listed businesses providing interesting and innovative products that could help contribute to some of the solutions to reducing our use of fossil fuels, but many of these are currently small and still trying to scale their products.

Recent activism by groups concerned by human impact on the climate has put this issue front and centre of many news media agendas. This is understandable when you look at some of the consequences of climate change; the Intergovernmental Panel on Climate Change (IPCC) reporting showing the trend of global warming, and it’s likely impact is here. There’s also plenty of material available via Google, I found this McKinsey report interesting.

There has also been an increase in the publication of articles on how investors can adapt their approach to ensure they are helping to be part of the solution rather than part of the problem. Morningstar recently published a number of articles on ESG (Environmental, Social, Governance) themed investing, just scrolling down their news archive shows how often this crops up, and for a while they have offered a sustainability rating for funds. The Guardian has published several articles on the investment world's reaction to climate change. That there is a more general interest can be garnered from Google Trends - a simple search for "ESG" over the last 5 years shows a distinct increase over the last year:

Google Trends: use of the term "esg" in google searches.

A few options....

I’m not interested in trying to trade stocks, preferring to invest in businesses. Part of my reason for choosing an investment is usually some sort of long term tailwind behind the business. In other words if the business is likely to be bigger and better in 5, 10 or 20 years into the future, then it might be worth investing. It doesn’t have to take over the world, a sensibly run business that throws off plenty of cash is fine with me.

Renewable energy is a sector that clearly has a tailwind, and the IT's focussed on renewables have a number of characteristics that I find appealing, such as generous dividend yields and low volatility. Renewable energy costs have reduced, so the economics now seem to behind renewables too. But how should I assess the potential benefits and pitfalls of the investment trusts giving such easy access to this sector?

A visit to the AIC website shows 12 ITs that are invested in renewable energy infrastructure:

I think here we have the starting point for assessing how comfortable I would be investing in these. Factors to consider would include:

Premium/ Discount:
This is the difference between the value of the assets (NAV) and the price at which the shares are being bought and sold. This is the main reason for me holding back on investing. If we make the assumption that the share value will move closer to the NAV over time, then buying at a premium is potentially going to impact negatively on returns. Another related statistic is the average premium at which the shares have traded recently - this isn't available above but can easily be found at various places such as Morningstar.

Gearing:
The investment policy of each of these should detail the approach to borrowing and gearing being used by the business. It's really worth digging into the business reporting and accounts rather than the simple summaries above to get the fine details.

Size:

As we can see the value of assets for each trust varies from Gore street at £28m to Greencoat UK Wind at £2.7bn. I think this, along with trading volumes should give a clue as to how volatile the trading and price movements of any such investment might be.

Currency:

A number of these trusts have a part of their portfolio outside of the UK, so may be subject to foreign currency movements and/ or local legal and regulatory changes that differ from the UK. Two of the trusts operate entirely outside of the UK – GRP and USFP, so are more exposed to these factors.

Charges:

Ongoing charges are going to directly impact returns so keeping an eye on these is a no-brainer. Some of the charges above are a little eye-watering.

Something not included at the AIC summaries relates to subsidies and the payment structures that these businesses use. A lot of these have been heavily subsidised, both UK and foreign Government approaches to subsidising these developments could impact these businesses as many of them have already invested beyond the UK.

When it comes to payment structures, chewing through the following acronyms: ROC, CFD, FIT, PPA could give you a little indigestion. Power Purchase Agreements (PPAs) help to reduce the volatility of wholesale electricity prices which as you see below can move around a bit:

Ofgem have a number of useful links for understanding the above - of particular interest should be Renewable Obligation Certificates (ROCs).

Other potentially interesting businesses that I have taken a look at are below:

AFC Energy - developing fuel cell technology to use hydrogen to generate electricity
Aggregated Micro Power Holdings - operates renewable energy facilities and finances various decarbonisation projects
Ceres Power - developing fuel cell technology to use various sources including ethanol and hydrogen.
ITM Power - developing technology to use hydrogen as an energy source
John Laing Group - infrastructure investment including renewables
Kingspan Group - manufactures a range of sustainable products for the construction industry
Powerhouse Energy - developing technology to use waste plastics for electricity and hydrogen production
SIMEC Atlantis Energy - renewable energy provider
Nexus Infrastructure - energy infrastructure provider including electrical vehicle charging
Fulcrum Utilitilies - Another energy infrastructure provider including electrical vehicle charging
Terry Smith also has a version of his famous Fundsmith now with an ESG flavour, which I only recently noticed.

I have a small position in Fulcrum Utilities, keeping an eye on the rest.

If anyone is particularly interested in investing in companies contributing to renewable energy I suggest checking out the diyinvestor blog for some excellent reading material.