By Kevin Burke

Since President Donald Trump won the 2024 election, investors have tempered their expectations for the renewable energy sector. The new administration seeks to roll back policy measures that provide tax credits and other incentives to clean energy companies and to businesses shifting away from fossil fuels.

But while lowered expectations are reflected in weak recent returns for the sector, some investors have a more optimistic long-term outlook. Whether they are more focused on protecting the environment or taking advantage of long-term economic growth, many people believe the transition away from fossil fuels is here to stay and are interested in investing in a clean-energy future, investment professionals have found.

"The long-term drivers for cheaper, cleaner, and more sustainable energy sources remain in place," says Hortense Bioy, global director of sustainable investing research at Morningstar Sustainalytics. "The aging power grid infrastructure in the United States still needs updating. Companies that are committed to reducing their carbon footprint still need support in their journey."

Research shows increasing global interest in sustainable investing, especially among Gen Z, millennials, and Gen X investors. A 2024 Morgan Stanley report indicates interest is driven by the recent inflationary environment, new climate science findings, and the financial performance of sustainable investments.

The research also shows that investors who know or assume that their sustainable investments underperformed their traditional investments report growing interest in the area. This suggests that sustainability-focused investors tend to be more concerned about long-term horizons and less focused on short-term fluctuations, according to the report.

What's going right. Indeed, there is reason for optimism. In the U.S., solar and wind generated more electricity than coal for the first time in 2024, according to the U.S. Energy Industry Association. And their growth rates outpaced gas generation. Plus, policy isn't the only driver: Tech innovation, economics, interest rates, and local market dynamics also drive the health of the sector.

"The long-term thesis supporting energy transition investments should remain Trump-proof," writes Liqian Ma, global head of sustainable and impact investing research at Cambridge Associates, in a January research report. "Private capital should continue to flow to innovative, cost-effective, and scalable solutions that address energy needs globally."

Importantly, not all elements of the Inflation Reduction Act are on the chopping block. Credits for bringing the manufacturing of clean energy technologies -- EV batteries, solar panels, and wind turbines -- back to the U.S. from Asia are likely to stay in place.

They align with Trump's economic policy and his intention to wrestle more jobs away from China. Cambridge's Ma views a continued focus on grid modernization and transmission infrastructure -- coupled with the Trump administration's plan to reduce bottlenecks for permits -- as a catalyst for clean energy.

Negative sentiment lingers. Despite favorable legislation and tax incentives under the Biden administration, investment in the clean energy sector has languished due to investor outflows and poor returns. Higher interest rates have also been a burden on some smaller growth-oriented sustainable companies. Hydrogen, solar, and electric vehicle companies need robust infrastructure investment, requiring them to take on debt and increasing their costs as interest rates rise.

Clean energy fund assets declined 27% in the first nine months of 2024, dropping to $6.4 billion at the end of September, according to Morningstar. Sustainable funds overall have lost $33 billion in assets in the past two years. Unlike previous years, in 2024 no conventional mutual funds shifted their mandate to sustainability, Morningstar found.

How to invest now. Advisors often put clients in either active or passive sustainable funds and may include investments in individual public or private companies to gain extra exposure. "For retail investors, ETFs are a logical choice," says Chris Fidler, head of industry codes and standards at the CFA Institute. "Private wealth -- where there is more freedom -- allows clients to take a more concentrated position in clean energy and you're less encumbered by regulation."

Institutional clients and family offices are better suited for a mix of green bonds, private equity, and public-private partnerships. However, advisors must conduct proper due diligence before investing in, say, an infrastructure fund. "They need to do their homework and understand the client's needs and risk appetite," Fidler says.

Some financial advisors express caution about investing in privately held clean energy companies, however.

"Private equity is more expensive, less tax efficient, and less liquid," says Jonathan Shenkman, president and chief investment officer at ParkBridge Wealth Management in Woodbury, N.Y. For next-gen clients who want exposure to renewables, Shenkman recommends a small allocation within a broadly diversified portfolio using specialized ETFs or mutual funds. "Allocating 5% or less to clean energy won't blow up your portfolio or derail your investment goals if things go south," Shenkman says.

Ben Loughery, a financial planner at Atlanta-based Lock Wealth Management who recently left asset management to hang out his own shingle as a wealth advisor works to ensure his clients' thematic investments don't undermine their long-term goals.

"In the past, ESG funds often had high expense ratios and limited diversification. These funds struggled because they lacked exposure to high growth sectors, such as tech and innovation companies," he says. "Today, we see major indices like the Nasdaq 100 and the S&P 500 incorporating ESG overlays. This evolution allows investors to capture the long-term growth of leading companies while making sure they meet higher ESG standards."

Loughery looks for ways to align clients' values with clean energy portfolios that are tax efficient and cost-conscious -- and have a strong track record. "For my clients, we use a mix of active and passive investments. In clean energy [stocks], we would use an ETF wrapper. However, in the muni bond space, we would recommend an actively managed mutual fund."

Right now, he sees renewables as a good bargain. "Solar hasn't found its footing. It's way oversold. You can make the case that it's a good time to get in."

It's also a global investing opportunity. "It boils down to economics," says Will Riley, portfolio manager of the Guinness Atkinson Alternative Energy Fund. "Sustainable sources of energy are cheaper than the incumbents. That's why you're seeing such explosive growth in parts of the world where GDP and population are rising."

Renewables have higher capital expenditures and lower lifetime costs. And that will ultimately drive the growth of the energy transition -- regardless of policy, he says. Right now, Riley, who runs a concentrated portfolio of 30 equally weighted stocks, is finding value in energy efficiency, electrification, and the electric vehicle supply chain.

Conventional wisdom on long-term investing still applies: "For financial advisors serving impact investors, it's important that they understand the different funds and their risk/return profiles before investing," Morningstar's Bioy says. "Ideally, you want diversified exposure to clean energy themes, tapping into multiple asset classes."

The bottom line: Being passionate about the planet can help power a client's portfolio, but they may well need the help of an advisor to look under the hood, kick the tires, and keep their emotions in check.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 27, 2025 13:45 ET (18:45 GMT)

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