Sustainable Investing: There’s a smart way to invest in the clean-energy transition right now (and not just EVs, solar and wind)

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Power from solar and wind sources, along with electric vehicles, attract some of the most attention when it comes to investing in green energy, but the brightest stock ideas right now may be LED lighting, insulation and other practical fixes that will help flip buildings “green.”

“Energy efficiency will continue to receive a good proportion of post-COVID stimulus spending, with a continued focus on buildings,” said Will Riley, a portfolio manager for the SmartETFs Sustainable Energy II exchange-traded fund
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in an outlook from his team at Guinness Atkinson Asset Management. The ETF launched in early January.

Areas they want to target include LED lighting, insulation and heat pumps, as well as power grid and transmission upgrades.

“It’s not the sexy part. It’s not the wind, the solar, the renewable installation equipment,” Riley told MarketWatch in an interview. “It’s building insulation. It’s LED lighting… it’s gauges to ensure that we’re using energy more efficiently. It’s not the stuff that gets the headlines, but… it’s available to every country to save. Everyone can do this.”

Riley and company based their call in part on International Energy Agency estimates that, to meet current government policies, energy efficiency spending needs to increase from a recent average around $250 billion annually to around $375 billion annually this decade and nearly $550 billion each year in the 2030s.

Buildings generate nearly 40% of annual global Earth-warming CO2 emissions, both in the energy they use and what goes into their construction, with concrete a huge driver of emissions.

‘It’s not the sexy part. It’s not the wind, the solar, the renewable installation equipment. It’s building insulation. It’s LED lighting… it’s gauges to ensure that we’re using energy more efficiently.’


— Will Riley

New infrastructure spending signed into law last year included building efficiency funds, such as some $1 billion for building energy codes, and new revolving loan funds supporting commercial building, home, public school and federal building upgrades.

Read more on what the new law included

Further, the Biden administration last month announced what it called the new “Buildings Performance Standards Coalition,” creating partnerships with 33 state and local governments — where 20% of the country’s building footprint and 22% of the U.S. population is located. The effort targeted how much energy older buildings might waste, upgrading heat, cooling and more-efficient appliances.

“One of the key secular trends that we’re focused on is the move away from liquid fuels around the world to electrification in all parts of our lives. Whether it’s transportation, buildings, heating industry, it’s going to get electrified. And in the process of doing that, typically the use of electricity is more efficient than using direct natural gas
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or direct oil,” Riley said.

Related: New York will restrict gas for cooking and heating, paving the way for more cities to follow

“We have two or three companies in the portfolio now spread across the U.S. market and the European market that specialize in kind of the full electrical-equipment supply chain from uninterrupted power sources to wiring to connectors to EV charging,” he added.

Read: The bitter breakup with gas stoves is getting closer — here’s another reason why

Riley said compliance rules prohibited him from directly naming stocks. Example holdings included in the electrification research highlighted Canada-based TransAlta Renewables
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and power generator and transmitter NextEra Energy
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Sweden-based NIBE Industries
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is an example of exposure to the heating, lighting and power-efficiency space. Sensata Technologies
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and Aptiv
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stand to benefit from the EV efficiency, the research said.

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Not to be ignored, either

Riley’s appreciation of energy-efficiency didn’t preclude relative bullishness on select solar, wind and EV-linked stocks, too, especially battery demand.

Riley and his colleagues expect global solar installations to grow in 2022 by over 20%, led by China, India, the Middle East and other parts of Asia. The outlook for solar in the U.S. this year is less certain due to holdups in passing more stimulus spending and Chinese import issues, as China is a major provider of solar components.

Biden will extend Trump-era tariffs on imported solar equipment by four years, a nod to U.S. solar manufacturers. But in a gesture for domestic solar installers, he eased the terms to exclude a panel technology increasingly used in big U.S. projects.

There does not seem to be the same optimism when it comes to the near-term outlook for wind power. The fund team projects flat installation growth, limited in part by inflation hitting components — though the U.S. push into offshore wind is seen as a positive factor in their outlook.

As for EVs and the batteries that run them, lower sticker prices, greater brand choice and growing consumer appetite continue to be the key drivers of projected improved EV sales.

Battery demand for use in EVs and energy storage will accelerate in 2022, they say. Raw material cost inflation will continue to have an impact, but increasingly manufacturing capacity, coupled with technological improvements, will push average battery pack costs towards $100/kWh, the level at which mass-market EVs become affordable.

Read: Beat inflation with 3 stocks that bet against oil in favor of EVs and the renewable-power grid

Transition isn’t binary

The fund manager also said that allowing climate-minded investing to be part of a “transition” to cleaner energy sources means thinking of ideas that will keep the economy growing, and avoiding the jarring effects of stranded assets as the world turns from traditional fossil fuels
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underinvesting in drilling and other operations.

Read: Don’t rule out natural gas in the clean-energy transition, trade group says

Riley advised potential investors to be mindful of the recent price shocks in natural gas
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leading to energy price fluctuations — in Europe especially — as the world snaps back from the worst of the pandemic, severe weather issues crop up, and as the West faces off with gas-leader Russia over Ukraine.

“There are some actors in the media who are portraying this as a kind of binary outcome: the old [energy] system or the new system,” Riley told MarketWatch.

“We need all these forms of energy in the short term. We need hydrocarbons to be performing. We need renewables to be performing and growing,” he said. “And obviously, over time, we’re going to see a tipping towards renewables, but it’s wrong to portray the industry as either/or. I think that’s become an unhelpful conversation.”