The transition from fossil fuels to renewables is well underway. The pandemic reduced oil demand, causing the oil price to plummet, and oil company share prices with it. Simultaneously, demand for renewable energy investments soared. There’s now an array of energy stocks and funds available. These range from pureplay renewables to energy transition or traditional fossil fuels.Â
Identifying value in ESG investing
I like investing in a mixture of individual stocks and funds in my Stocks and Shares ISA. I think funds can offer diversification when my budget is limited. They also save me time trying to evaluate numerous companies. But at the same time, as the transition from oil to renewables continues and the number of individual stocks and funds available has surged, my big question is: do I decide whether to go eco, or traditional — or both?
I can actually do both via funds focused on traditional oil firms or buy these companies’ shares direct. Since news of successful vaccines arrived, the oil price has been creeping back up and now oil companies see light at the end of the tunnel. But it’s not just business as usual for them. Many of the oil majors like BP and Shell are transitioning into renewables to put their expertise and access to capital to good use.
Investors like me are also demanding much more sustainable routes to investing and ESG investing has brought an influx of funds to meet this need. To begin with, the worry was that renewable funds wouldn’t be able to produce returns as impressive as the ‘sin stock’ funds before them. This is no longer such a concern and with low oil demand last year, many ESG funds outperformed their benchmarks.
I think this trend is likely to continue. But green energy mania reached new heights in 2020, and renewables-focused funds now have equities in them that are possibly overvalued. This means consistently achieving high returns could be difficult.
Investing in energy stocks through funds
Funds focused purely on oil are few and usually US-based, such as the iShares Oil & Gas Exploration & Production UCITS ETF or SPDR S&P Oil & Gas Exploration & Production ETF. These are clearly much riskier and not environmentally friendly. But for those that believe a much higher oil price is to come, then they could offer an impressive risk-reward ratio.
Alternatively, there are funds that incorporate both fossil fuels and renewables via the energy transition itself. Trium ESG Emissions Impact fund is focusing on companies in high emissions sectors that are making an effort to reduce their carbon footprint and improve their transparency. It holds Antofagasta and Centrica.
The Gore Street Energy Storage Fund invests in energy storage facilities, including batteries. I also own shares of The Renewables Infrastructure Group, which covers a portfolio of 74 renewable assets covering wind, solar and battery.
For balance, I think it’s good to diversify. Owning baskets of stocks with different areas of focus can help hedge against sectors faring badly or overvalued companies. However, for those with a bigger budget and time to manage their portfolio, I think buying individual energy stocks can be rewarding too. And studying the holdings of an ETF can spark ideas for energy stocks to invest in.