As an oil crash pummelled the stock markets last week, one major Canadian institution did what environmentalists once considered unthinkable — it divested from fossil fuels.
The University of Guelph announced Friday that it will move its endowment portfolio away from pollutant-based sectors and reinvest in clean energy, satisfying long-standing demands of activists and underscoring the liabilities of investing in a sector that, in recent years, has seen a significant plunge in value.
Investors looking to shed the current burden of oil and gas stock may be wise to follow suit, says Tim Nash, founder and investment coach at Good Investing.
“There’s no doubt there was once a carbon bubble, and right now that carbon bubble has popped,” Nash said. “In my opinion, we’re going to start seeing dividend cuts and bankruptcies in the oil and gas sector. Investors are going to have to take a long, hard look at their exposure to carbon risk and how much it’s going to cost them and their portfolio.” The economic downturn brings mixed news for clean energy initiatives, though Nash says investors still have options for how best to navigate renewable energy investments amidst COVID-19.
In much of the clean energy sector — innovations in fuel-efficient and electric transportation, for example — businesses are facing the same economic struggles as most major industries navigating the demand shortage brought about by the pandemic. Plus, dirt cheap oil prices often mean that buyers will opt for petrol over clean energy.
“When gas prices are higher, there are larger financial incentives to shift toward efficient vehicles. If oil prices stay low, people are disincentivized from shifting toward a different, more efficient vehicle, for example, because it’s cheaper now to fill up on gas,” Nash said.
Nash says most investors should look toward renewable energy utilities for lower-risk and potentially generous dividends. Companies like Brookfield Renewable Partners, which generates
electricity through hydro, wind and solar projects, or the Algonquin Power & Utilities Corp., which owns and operates similar clean energy assets, are safer bets, he says.
“Rather than develop the technology, they own the wind farms and solar projects, and have long-lasting contracts to sell renewable energy to the utilities at a specific price,” he said.
“These investments are going to be much more stable if the pandemic drags on. They’re less of a growth investment and more of a value investment.”
Nash made note of similar companies, such Innergex Renewable Energy, Boralex power producer and Northland Power.
John Cook, president and CEO of Greenchip Financial, says much of the investment risk depends on how governments stimulate the economy as the pandemic winds down. There are parts of the “green economy” that are more likely than others to get early stimulus spending from the government, he says.
“Infrastructure investments are always part of a stimulus program, and I think governments have incentive to tie infrastructure spending where they can to more sustainable investments, and that includes investment in renewable energy,” Cook said.
“One possible infrastructure investment, I think, will be the retrofitting of buildings and houses — largely because we know that about a third of energy use goes toward heating, cooling and lighting buildings, and an infrastructure program like that could put lots of people back to work.”
Cook says such a program is not unprecedented amid economic stagnation.
“We’ve seen in other economic downturns, when governments want to stimulate the economy, that they’ll create programs like these to get people back to work. And I think there’s more incentive, especially in Canada, to tie those programs to climate change plans,” he said.
For Nash, investment choices in clean energy now come down to the risk profile of the investor. While risky for most, younger investors with time to spare don’t necessarily need to shy away from investment in clean technology and innovation.
“It might be choppy in the short-term, but if you’ve got a timeline of 20 to 40 years, the odds that governments are going to take meaningful action on climate change go up dramatically the further out we go,” he said.
“Investors with a lower-risk profile, however, like older investors who are in retirement who might be looking to generate income, I would suggest looking at renewable energy utilities as a safer way to invest in green energy for now.”