Climate change affects more than how we live—it also impacts how we invest.
By some estimates, the global economy could shrink by 18% in the next 30 years if no action is taken to mitigate climate change. The Intergovernmental Panel on Climate Change warned that the window of opportunity to take any meaningful climate action is rapidly closing. Worldwide emissions must fall by half by 2030 and reach net zero by 2050 to have any chance of keeping global temperature rise under 1.5 degrees Celsius, the threshold at which, scientists agree, we can forestall the worst effects of global warming.
The risk that climate change poses to investors is twofold: Certain industries may be particularly vulnerable to extreme weather events that result from a warming planet; other industries may be disadvantaged in the pursuit of net zero.
Renewable energy will play a significant role in the transition to a low-carbon economy, so investors looking to invest in climate action should consider this area.
But there are other incentives to invest in renewable energy as well: The Inflation Reduction Act, which was signed into law on Aug. 16, 2022, includes measures to address climate change that will benefit the clean energy industry, creating further investment opportunities.
Here are two renewable energy stocks we think are particularly well-positioned to benefit from the climate legislation:
They are currently trading at fair value according to our analysts, so investors may want to add these stocks to a watchlist rather than jump right in.
First Solar Will Benefit From U.S. Solar Credits
The Inflation Reduction Act includes a 10-year extension for solar power credits, which is significant as the prior incentives were going to roll off over the next couple of years. According to Morningstar equity analyst Brett Castelli, the credit extension is going to end up adding a lot of value to stocks leveraged to the solar power. First Solar stock has seen a 56.91% year-to-date jump as of Sept. 13.
The climate legislation also includes incentives for domestic solar manufacturing. Castelli anticipates a big shift in the U.S. to domestic manufacturing for solar and for the inverters used in solar power. There may also be political motivation for these incentives, as China has historically dominated solar panel manufacturing. First Solar is particularly poised to benefit from the shift to domestic manufacturing due to its existing U.S. manufacturing presence, and Castelli expects the company to expand its U.S. manufacturing capacity in the coming years.
First Solar designs and manufactures photovoltaic solar panels, modules, and systems for use in utility-scale development projects. (For context, a solar panel is made of connected solar modules.) First Solar is the world’s largest thin-film solar module manufacturer, and is “uniquely positioned given its differentiated thin-film panel technology, existing U.S. manufacturing presence, and multiyear forward contracts,” says Castelli.
To be sure, First Solar lacks a long-term competitive advantage, because the solar module industry is fiercely competitive and increasingly commoditized. This is especially true in utility-scale projects where consumers seek out the lowest price rather than the highest-efficiency solar panels. Further, companies struggle to differentiate themselves as new technology is quickly copied by competitors.
Still, First Solar’s balance sheet is the strongest in the solar module industry. The company boasts over $1.8 billion in cash and investments as of midyear 2022. According to Castelli, “This strong financial position is a competitive advantage.” In a cutthroat industry like solar, a strong balance sheet is a major green flag.
Plug Power Will Benefit From Incentives for New Clean Energy Technology
Another area of climate action in the Inflation Reduction Act targets innovation in clean energy technology. Two of the bigger beneficiaries of clean energy technology incentives will be hydrogen and energy storage. As a leader in green hydrogen, Plug Power is poised to take advantage.
While creating hydrogen gas has historically been a carbon-intensive process, green hydrogen is produced using renewable energy sources, which eliminates most of the carbon emissions from the process.
Plug Power is building an end-to-end green hydrogen ecosystem—from production, storage, and delivery to energy generation. The company aims to provide a one-stop-shop for its customers, which makes it easier for them to adopt green hydrogen. While this one-stop-shop strategy is more capital intensive, “Plug is the only all-in-one provider within the industry,” says Castelli. “The ambition of Plug’s strategy stands out relative to peers who focus on simply providing fuel cell or electrolyzer solutions.”
Like many areas of renewable energy, the green hydrogen market is still young. Plug Power has yet to build out a long-term competitive advantage, but its strategy of tapping into different areas of the market, rather than just focusing on highly competitive areas like fuel-cell electric vehicles or electrolyzers, may help the company develop a moat in the future.
Plug Power recently struck a deal with Amazon AMZN to fuel its operations beginning in 2025.
Renewable Energy Funds Provide an Alternate Route to Climate Action
While buying renewable energy stocks allows investors to fund climate action through companies that directly align with their preferences, funds allow investors to take a broader approach. Investors have already sought out renewable energy investments in response to climate legislation and are funneling money into clean energy funds.
Morningstar’s Jon Hale provides some diversified clean energy funds to consider:
- ALPS Clean Energy ETF ACES
- First Trust NASDAQ Clean Edge Green Energy Index QCLN
- Invesco Global Clean Energy ETF PBD
- Invesco WilderHill Clean Energy ETF PBW
- iShares Global Clean Energy ETF ICLN
- SPDR Kensho Clean Power ETF CNRG
As the renewable energy space continues to grow and develop, renewable energy stocks may be volatile. Investing in funds mitigates some of the volatility that may come with owning individual renewable energy stocks.
Still, Hale recommends keeping clean energy funds out of your core portfolio in favor of more-diversified funds.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.