Investors who bet on a shift from fossil fuels to clean energy are being richly rewarded as solar and wind stocks outperform oil and gas shares by a widening margin this year.
The ishares Clean Energy exchange-traded fund has risen by 32 per cent so far this year, streaking far ahead of the oil-dominated Vanguard Energy ETF, which has risen by only 1 per cent.
In August, the renewables fund bettered the fossil fuel ETF by the biggest margin in five years.
Renewable energy developers have been benefiting from a sharp reduction in the cost of wind and solar in recent years, which has made them cheaper than coal and natural gas at certain times in many markets.
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The cost of solar has fallen 85 per cent since 2010, while wind power has dropped about 50 per cent, according to Bloomberg New Energy Finance.
Renewable stocks also outperformed oil and gas shares in 2017 and 2018, although both sectors ended last year down.
So far this year, the largest renewable energy ETF in the US, Invesco Solar, has risen 58 per cent.
Low global interest rates are also helping, making it easier to fund solar and wind projects that have high upfront costs but low operating costs, said Deirdre Cooper, who runs the Investec Global Environment fund.
“Decarbonisation is the largest investment the world has ever had to make in peacetime and the yield curve is giving us an extremely attractive environment in which to make that investment,” Ms Cooper said.
The stock rally has come despite a fall in global investment in clean energy during the first half of 2019, sparked by a reduction in government subsidies for renewable energy. Investor sentiment has remained positive in part because a number of large economies have made longer-term pledges to reach net zero emissions, which would eliminate fossil fuel power.
The strong performance of the renewables sector marks a turnaround from the years immediately after the financial crisis, when investor bets on green energy quickly soured. Shares in the ishares Clean Energy ETF fell 80 per cent between 2008 and 2013.
This year, in contrast, oil companies have been far less of a draw despite high dividend yields and a greater focus on capital discipline.
“One thing the market is really grappling with energy companies at the moment is how to value them,” Thomas Holl, a fund manager at Blackrock, said.
