This is the second article in a new series from Good With Money: “How To Invest In Renewable Energy” produced in collaboration with Mint Selection, a renewable energy finance and project development recruitment consultancy.
Investment in renewable energy is booming, with nearly £216 billion of new money pumped into renewables projects across the world last year – 500 per cent more than in 2004. And it’s not just money from banks and governments spurring this renewable revolution: individuals are also cashing in on climate action by investing in renewables through funds, shares and even crowdfunding.
Below we outline a few financial planning considerations that new investors in renewables should consider before taking the plunge.
What are you investing for?
As with all investing, those interested in buying into renewable energy should start by asking a few key questions, the most important being: what is your investment for? Are you a curious dabbler, for example, or are you looking for a safe spot for your pension savings? Part of this is thinking about what you want your investment to do for you. Do you want to make lots of money; or is what you invest in more important? Even if it is, is there a minimum amount of growth you need? The answers to these questions will help you to hone-in on the right investment for you, so answer them carefully and use this as your guide.
When do you need your money back?
Thinking about time-horizon, or when you need your money back, is another important consideration for any investor. If, for example, you are a young person investing for a pension, then your time horizon is likely to be much longer than someone planning to use the money to buy a house in five years. In the latter case an investment that doesn’t expect to pay out for a decade or two – which some start-up renewable projects don’t – won’t be for you. The longer you have to invest the more options will be open to you and, indeed, the better your investment is likely to do.
Income or growth?
Many types of renewable investment – particularly bonds and community shares – pay a regular dividend, or interest payment. This makes them attractive for those that need a regular income from their investment, like retirees or students. Those that don’t need to take an income can target higher growth companies and projects, investing directly into them in the hope their value will increase strongly over time. Typically an income approach is less lucrative over the long term than a growth-led one – though there are always exceptions.
How much risk do you want to take?
Your investment objectives may also guide your risk level. For example, if you are 25 and investing for your retirement in more than 40 years’ time, you can afford to take a lot of risk. This is because short-term market movements are usually ironed out over time (even major financial crises). If you are 55 and saving for a pension, though, you should be cautious. Ultimately, however, you should be guided by your feelings about loss. If the thought of losing any money – even for a short time – makes you queasy, then maybe play it safe. Otherwise you risk making the biggest of all investment mistakes: selling at the bottom of the market.
What do you want to invest in?
Once you know what your investment is for; how long it will be invested; whether or not you need an income; and how much risk you want to take, you can move onto the exciting stuff: what to invest in. Are you silly for solar? Or maybe hooked on hydro? Or perhaps you want to spread your investment across a range of renewables. Luckily, today’s renewable energy investment landscape is brimming with opportunities in every kind of area. Good places to start include Ethex.org.uk, Abundanceinvestment.co.uk and Triodos.co.uk – all of which list renewable projects in both the UK and abroad. See Part 1 of this series, ‘How to Invest in Renewable Energy’, for more.
Lump sum or regular savings
The type of renewable investment you choose may also influence how you invest. Some projects, like shares in a community solar project, for example, only allow for one-off investments. Investment funds and trusts, however, are more flexible, allowing investors to put in as little or as much as they like, when they like. You can use an investment return calculator to help you decide which might be better over your time horizon, particularly if your target investment has a predicted annual return. Good examples include these from Aviva, Selftrade and Hargreaves Lansdown.
Keep your profits tax-free
Finally, make sure you are keeping as much of your renewables profit as possible by sheltering your investment inside either a stocks and shares ISA or an Innovative Finance ISA (IFISA). The former is suitable for investments in more mainstream funds and trusts, while the latter is for areas including crowdfunding, as well as unlisted bonds and equities. Not all renewable investments are ISA eligible, though, so be sure to check. For more on the Innovative Finance ISA, see the Good With Money IFISA Guide.
Quick tools for analysis
As we explored in part one of this series, there are a plethora of different types of renewable energy investment available – from investment trusts and funds to community share and bond offers to crowdfunding. Each requires a different type of analysis, which we will be explore in detail in coming posts.
To get you started, though, here is a quick guide to common terms you might come across when browsing renewable energy investments.
Dividend yield is like an interest rate and expresses what you will be paid for your investment. For example, if the annual dividend yield is 5 per cent and you invest £1,000, you will be paid £50 a year. Dividends are usually paid twice or four times a year. Bonds always pay a dividend yield, while equity investments like shares, trusts and funds don’t always pay one.
Net Asset Value (NAV)
This relates to investment trusts and means the value of the investments inside the trust. Sometimes, the NAV is higher than the value of the shares, and this is called a share price discount. If you buy at a discount you will be paying less than the trust is worth, but that will only pay off if the share price increases.
Price Earnings Ratio (P/E)
This is a term used when talking about share prices and compares a company’s share price to its earnings. The lower the ratio, the better value the company, or stock. It is most relevant when assessing individual companies.
This refers to the time it will take to recover an initial investment and start seeing a return. For example, if it costs £5,000 to instal a solar heating system that is saving you £1,000 a year on your heating bills, the payback period is five years. It is relevant for community share and bond offers.
Price Earnings Growth (PEG)
Similar to PE, this is used for share prices and compares the price of a share to how much the company’s earnings are growing. Again, the lower the ratio, the better value a stock is and it is most relevant when looking at individual companies.
Return on Equity (RoE)
RoE expresses how much an investor gets back versus what they put in. The higher the percentage, the more money you’re making. Again this is usually relevant for equity investments including shares in an individual company, as well as investment trusts and funds.
Always remember that investments can go down as well as up and investors may not get all of their initial investment back. Some of the above tools only measure past performance, not future performance, and so are not necessarily a reliable indicator of returns.