Why Investors Should Consider Holding Renewable Energy Stocks
The world is in the process of moving away from fossil fuel energy towards cleaner alternatives. Using more renewable energy sources will play an important role in this transition but the sector will need to grow before it can do this effectively, presenting investors with significant opportunities. So, what are they?
In this article, we’ll explain why investors should consider holding renewable energy stocks in their portfolios.
What are renewable energy stocks?
Renewable energy stocks are shares of companies that operate in the renewable energy industry, listed on stock exchanges and purchasable via trading apps and platforms.
These companies produce and distribute energy generated from renewable energy sources such as wind, solar, hydroelectric, geothermal and bioenergy.
Some examples include:
- Greencoat UK Wind (UKW.L) a company operating wind farms across the UK
- Ormat Technologies (ORA), a company that produces geothermal energy
- The AES Corporation (AES), a company that helps businesses transition to renewable energy sources
Why invest in renewable energy stocks?
Investors can improve their portfolio’s potential returns and make a difference by investing in renewable energy stocks.
The links between fossil fuel use and climate change are becoming increasingly evident, with extreme weather patterns becoming more prevalent each year. As a result, governments around the world are prioritising a transition to ‘net zero’ economies – economies with a neutral effect on the atmosphere’s carbon levels.
The USA’s recent Inflation Reduction Act gives subsidies to companies developing renewable energy. The UK government has pledged to achieve net zero by 2050. And the European Union has announced its own renewable energy investment plan, called the Green Deal Industrial Plan.
Thanks to this surging demand for decarbonisation, the top renewable energy stocks could provide some of the best returns for investors in the coming years.
What are the risks of investing in renewable energy stocks?
The biggest risk is that governments won’t succeed in their targets to eliminate fossil fuel energy by 2050.
The current climate goals are ambitious and will require changes in energy consumption that take place over the span of generations. Humanity has only changed its main energy source twice since the 19th century: from wood to coal in 1900 and then from coal to oil in 1960. In both cases, it took decades to successful make the transition – longer than the rapid rate of change needed to achieve net zero by 2050.
Are renewable energy stocks a buy?
If the world isn’t net zero by 2050, then the renewable energy sector won’t have grown in the way that many are predicting it will. In that case, investors might find that renewable energy stocks haven’t made as lucrative a holding as hoped.
That being said, climate change isn’t a problem that can be left any longer. Even if net zero targets aren’t achieved by 2050, it’s likely that governments will still be providing all the support they can to achieve them soon after. Renewable energy stocks might not outpace the wider market, but they should still give ample returns.
So, are renewable energy stocks a buy? It’s far too early to say for certain. But at the very least, they could be a smart way for investors to lower their portfolio’s carbon footprint and make a difference – without detracting significantly from their potential returns.
