Cherry Reynard, AIC Compass Magazine, 10 Nov 2023:
World leaders gathering in the UAE for the COP 28 at the end of November are likely to reach the now-familiar conclusion that countries ‘could do better’ on net zero targets. A cursory glance at the recent returns of renewable energy and environmental trusts – and their wide discounts to net asset value – might also suggest a growing disillusionment with the green agenda.
James Carthew, head of investment companies at QuotedData, says: “Discounts on renewable energy funds are extreme and falling share prices have driven some of them onto double-digit yields. Governments, including that of the UK, have been reining in climate change policies and there seems to be a race to approve new oil and gas projects on the grounds that we’ll be using fossil fuels for years yet.” He believes it is unlikely that anything will emerge from COP 28 that will be of meaningful benefit to the renewables and environmental sectors.
There has also been gloomy news elsewhere. Orsted has had to axe two New Jersey wind projects, taking a $4bn impairment, while Swedish multinational power company Vattenfall has abandoned the 1.4-gigawatt Norfolk Boreas offshore project. Both cite rising build costs and weak profitability.
This difficult backdrop has also come at a time when renewable energy infrastructure and green investment companies have also been hit by rising interest rates. Gavin Haynes, investment consultant at Fairview Investing: “A higher for longer interest rate environment needs to be priced into the funding of these long-term projects and has also led to income-seeking investors ditching these investment trusts in favour of less risky assets.” The final problem for many funds, says Carthew, has been sustained selling by fund of funds and wealth managers because of complex new rules on cost disclosure…
Carthew says the selling associated with cost disclosure rules is coming to an end and the discounts compensate investors for many of the risks. He highlights Gore Street Energy Storage Fund, which trades on a 39.8% discount to NAV and has a 10.9% yield, or NextEnergy Solar Fund on a 25.2% discount with a yield of 10.2%. Haynes favours Impax Environmental Markets and the Renewables Infrastructure Group.
Read more here