Issue 28: 2014

Investment Strategy

Opportunities in the Low-Carbon Economy

Investors may benefit from wider use of sustainable energy and growing efficiency.

Ben Welsh/Design Pics/Offset

» Click here to access your account and more insights.

» Not a client yet? Click here to find an office or have us contact you.

An overwhelming majority of peer-reviewed scientists agree that we must significantly reduce the amount of carbon and other heat-trapping gases that are released into the atmosphere by human activity. Failure to do so, they say, could result in climate disruption — including coastal flooding, increased drought conditions and other catastrophic circumstances — before the end of the century.

To make matters worse, carbon emissions seem likely only to rise, with the global population to reach 9 billion by mid-century, according to United Nations estimates, and with the ongoing emergence of consumer classes in developing regions — two factors in what U.S. Trust and Bank of America are calling “The Five Forces of Global Change.”

Sustainable energy for all

There are important ways to reduce the production of carbon emissions, such as increasing the use of renewable energy and improving energy efficiency. Production costs for many renewable energy technologies are now equal with fossil fuels (without government subsidies) and overall costs should continue to decrease as they reach greater economies of scale and become more widely used worldwide.

The United Nations recently set up a public-private initiative with the goals of doubling both the renewable energy use and rate of uptake in energy efficiency by 2030. It’s called Sustainable Energy for All, or SE4ALL. (Representatives from Bank of America Global Corporate Responsibility have been working with SE4ALL to explore the financial implications associated with their energy-efficiency objectives.)

To meet the goals of the initiative, SE4ALL estimates that investment in renewables will need to rise from $154 billion to $320 billion. And investments in efficiency will need to increase from $225 billion to $390 billion.

Investment opportunities

Where might investors look for related investment possibilities? SE4ALL sees the largest-scale, near-term opportunities in renewable energy sources — solar, wind and hydroelectric — primarily in the United States, China and Western Europe. Other potential opportunities exist in raising the energy efficiency of buildings, transportation systems and energy infrastructures, primarily in the United States, China and the former Soviet Union.

Two new opportunities were created with
sustainability in mind.

Investment goals

In terms of the goal for returns on investments linked to sustainable energy, investors typically vary depending upon where they situate themselves on the “financial returns” versus “social returns” spectrum.

SE4ALL’s work on finance has focused on identifying three different types of opportunities for different categories of investors:

  • Investors that are primarily focused on financial returns.
  • Investors that are primarily focused on social returns.
  • Investors that have potential to deliver a blended financial and social return.

Investment instruments

Sustainable investments include debt and equity instruments. Two new opportunities — green bonds and yieldcos, both created with sustainability in mind — are attracting investor attention.

The green bond is a fixed-income instrument whose proceeds are typically allocated to renewable energy or energy-efficiency projects, in both developing and developed countries. A number of large institutional investors have begun to commit significant funds to purchase green bonds. This has led to greater corporate issuance of new green bonds, including the first corporate issuance of a U.S.-dollar-based green bond by Bank of America.

The market integrity of green bonds is underpinned by governance called the Green Bond Principles. More than 60 entities involved with green bonds, including issuers, intermediaries and investors, are now signatories to this set of principles, which include a commitment to regular and accurate financial reporting. Issuance of green bonds will have increased almost four-fold, from $11 billion in 2013 to a projected $40 billion by the end of 2014, according to SE4ALL estimates.

A yieldco is a publicly traded company that owns a portfolio of operating assets focused on mature technologies in the renewable energy sector. Many investors may find yieldcos attractive for several key reasons:

  • They combine a pool of assets, creating an investment vehicle of suitable scale and diversity.
  • They are designed to provide reasonably predictable cash flow, and offer potential appreciation in equity valuation.
  • They typically have fewer risks associated with them than other renewable energy investments, such as being exposed to liquidity risk or construction risk.

What’s ahead?

As the costs of low-carbon alternatives continue to fall relatively close to existing more-mature energy technologies, SE4ALL anticipates that the number and variety of investment opportunities in renewable energy and energy efficiency will increase with this trend.

If you are interested in learning more about investing in energy, including whether it is an appropriate fit with your overall investment goals, please contact your U.S. Trust advisor.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Fixed Income
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.

International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

Commodities
Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.

An overwhelming majority of peer-reviewed scientists agree that we must significantly reduce the amount of carbon and other heat-trapping gases that are released into the atmosphere by human activity. Failure to do so, they say, could result in climate disruption — including coastal flooding, increased drought conditions and other catastrophic circumstances — before the end of the century.

To make matters worse, carbon emissions seem likely only to rise, with the global population to reach 9 billion by mid-century, according to United Nations estimates, and with the ongoing emergence of consumer classes in developing regions — two factors in what U.S. Trust and Bank of America are calling “The Five Forces of Global Change.”

Sustainable energy for all

There are important ways to reduce the production of ?carbon emissions, such as increasing the use of renewable energy and improving energy efficiency. Production costs for many renewable energy technologies are now equal with fossil fuels (without government subsidies) and overall costs should continue to decrease as they reach greater economies of scale and become more widely used worldwide.

The United Nations recently set up a public-private initiative with the goals of doubling both the renewable energy use and rate of uptake in energy efficiency by 2030. It’s called Sustainable Energy for All, or SE4ALL. (Representatives from Bank of America Global Corporate Responsibility have been working with SE4ALL to explore the financial implications associated with their energy-efficiency objectives.)

To meet the goals of the initiative, SE4ALL estimates that investment in renewables will need to rise from $154 billion to $320 billion. And investments in efficiency will need to increase from $225 billion to $390 billion.

Investment opportunities

Where might investors look for related investment possibilities? SE4ALL sees the largest-scale, near-term opportunities in renewable energy sources — solar, wind and hydroelectric — primarily in the United States, China and Western Europe. Other potential opportunities exist in raising the energy efficiency of buildings, transportation systems and energy infrastructures, primarily in the United States, China and the former Soviet Union.

Two new opportunities were created with sustainability in mind.

Investment goals

In terms of the goal for returns on investments linked to sustainable energy, investors typically vary depending upon where they situate themselves on the “financial returns” versus “social returns” spectrum.

SE4ALL’s work on finance has focused on identifying three different types of opportunities for different categories of investors:

  • Investors that are primarily focused on financial returns.
  • ?
  • Investors that are primarily focused on social returns.
  • ?
  • Investors that have potential to deliver a blended financial and social return.

Investment instruments

Sustainable investments include debt and equity instruments. Two new opportunities — green bonds and yieldcos, both created with sustainability in mind — are attracting investor attention.

The green bond is a fixed-income instrument whose proceeds are typically allocated to renewable energy or energy-efficiency projects, in both developing and developed countries. A number of large institutional investors have begun to commit significant funds to purchase green bonds. This has led to greater corporate issuance of new green bonds, including the first corporate issuance of a U.S.-dollar-based green bond by Bank of America.

The market integrity of green bonds is underpinned by governance called the Green Bond Principles. More than 60 entities involved with green bonds, including issuers, intermediaries and investors, are now signatories to this set of principles, which include a commitment to regular and accurate financial reporting. Issuance of green bonds will have increased almost four-fold, from $11 billion in 2013 to a projected $40 billion by the end of 2014, according to SE4ALL estimates.

A yieldco is a publicly traded company that owns a portfolio of operating assets focused on mature technologies in the renewable energy sector. Many investors may find yieldcos attractive for several key reasons:

  • They combine a pool of assets, creating an investment vehicle of suitable scale and diversity.
  • They are designed to provide reasonably predictable cash flow, and offer potential appreciation in equity valuation.
  • They typically have fewer risks associated with them than other renewable energy investments, such as being exposed to liquidity risk or construction risk.

What’s ahead?

As the costs of low-carbon alternatives continue to fall relatively close to existing more-mature energy technologies, SE4ALL anticipates that the number and variety of investment opportunities in renewable energy and energy efficiency will increase with this trend.

If you are interested in learning more about investing in energy, including whether it is an appropriate fit with your overall investment goals, please contact your U.S. Trust advisor.