The original version of this post was first published on EDF’s Energy Exchange blog.
Global capital markets are waking up to the clean energy investment opportunity. But you don’t have to be Citigroup to put your money on cleantech or renewable power.
The industry’s rapid growth also presents an interesting diversity of long-term opportunities for individuals like you and me who may want to participate in the low-carbon economy. Here are four financial instruments that allow individual investors to join in:
1. Climate Bonds and Green Bonds
A bond helps companies or governments borrow money from investors for a defined period of time at a fixed interest rate. Climate and green bonds are used exclusively to finance new and existing climate or environmental sustainability projects.
These bonds have been a success story over the past two years, increasing from about $5 billion in 2012 to $15 billion in 2013, and then to $38 billion in 2014, according to Bloomberg New Energy Finance.
BNEF expects this trend to continue and the volume of green bonds to double again to a whopping $80 billion in 2015.
Equities are a riskier option than a bond because if the company in which an investor bought stock decreases in value, the investor loses money.
There are plenty of publicly traded companies operating in the clean energy space, such as solar panel manufacturers or battery storage developers. You limit risk by selecting the right technology or venture to back before making your investment.
Take Tesla, a publicly traded clean energy company whose stock price grew more than 40 percent to $222.41 on Dec. 31, 2014. If an investor had purchased 100 shares a year earlier and then sold them the last day of 2014, he or she would have earned a hefty return of more than $7,000.
3. Index Funds
In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Indices are often the basis for mutual funds and exchange-traded funds, or ETFs.
These index funds enable investors who want to get behind an industry, but lack confidence in their abilities to identify specific winning companies, to bet on the industry at large. Two examples of clean energy index funds:
- PowerShares Global Clean Energy Portfolio: This ETF is based on the Wilder Hill New Energy Global Innovation Index, which includes 107 companies focused on a broad spectrum of clean technologies.
- Guggenheim Solar ETF: This ETF, based on the MAC Global Solar Energy Index, includes companies that operate across the solar energy value chain, including manufacturers of solar equipment and companies that finance, develop and manage solar projects.
Both funds and the group of companies they include are rebalanced and reconstituted on a quarterly basis.
A yieldco is a growth-oriented public company created by a parent company that bundles renewable or conventional long-term contracted operating assets to generate predictable cash flows.
An attractive feature of yieldcos is that they do not typically take on development or construction risk, which is born either by the parent company or a third-party developer. Investors in yieldcos are paid back via dividends that derive from the profits of the asset.
A number of companies have recently created yieldcos for clean energy assets and options for investments are now growing by the day.
Seek professional advice before you invest
Interested? Make sure you see a professional financial advisor to minimize risk and get the most tailored, up-to-date advice on how to engage in the clean energy finance market.
And remember, green bonds, equities, index funds and yieldcos are just a few of the instruments that now let us capitalize on the clean energy investment trend.
EDF is not a registered financial advisor and as such cannot provide professional investment advice.