An unprecedented combination of political, economic and financial factors has brought clean energy to the forefront of ESG agendas and to the attention of investors. In the fight against climate change, reducing emissions from the energy sector – which accounts for nearly three-quarters of greenhouse gas emissions – has become mission critical. 
Major advances in the field of clean energy has been one of the most significant industrial developments of the past decade. These are energy sources that are naturally replenished and produce renewable energy such as wind and solar power as well as carbon dioxide and methane capture technologies that aim to eliminate greenhouse gases.
A game changer for the renewable energy industry has been a profound improvement in economics. Once considered expensive to produce, 56 per cent of additional renewable power in 2019 achieved a lower electricity cost than the cheapest new coal plant.
The days when governments could only encourage the adoption of clean energy by subsidising it seem to be over. Solar energy is a case in point, with the cost of solar energy falling by 82 per cent between 2010 and 20191. According to the International Agency for Renewable Energies (IRENA), over the long term, renewable energy like solar and wind will become even cheaper than oil, natural gas and coal thermal power well before 2040.
There is an unprecedented consensus among the vast majority of countries, including the most polluting, China and the US, which account for 28 per cent and 15 per cent of emissions, respectively. They are all working on action plans that they will present in November at the UN Climate Change Conference (COP26), plans that will translate the commitments made in 2015 at COP21 in Paris to limit global warming by 2050.
40% increase in the share of clean energy in Europe
The European Union has led the way with its Green Deal launched at the end of 2019, which has made carbon neutrality by 2050 a priority, with an intermediate target of reducing CO2 emissions by 55 per cent from 2030 (compared to the 40 per cent initially planned). This target implies a 40 per cent increase in the share of clean energy in the European energy mix (compared to 32 per cent initially).
China, for its part, is aiming for carbon neutrality by 2060, an objective included in the 14th five-year plan (2021-25) which was presented on 5 March and provides for an 18 per cent reduction in carbon intensity as well as a growth in the share of non-fossil fuels in the energy mix from 16 per cent in 2020 to around 20 per cent in 2025.
As for the US, which rejoined the Paris Agreement on 20 January 2021, it has committed to having a 100 per cent clean energy and zero CO2 emission economy by 2050 at the latest, with an intermediate target of decarbonising all energy production plants by 2035. Symbolic of this shift in US policy were the halting of the Keystone XL pipeline extension to bring crude oil from North Dakota and the cancellation of the Alaskan Arctic drilling project.
Compelling opportunities for investors
This growth in clean energy will require substantial investment and innovation both from governments and the private sector, opening up compelling opportunities for investors.
According to the IRENA, cumulative investment in the energy system between 2015 and 2050 will need to increase around 30 per cent, from $93trn according to current and planned policies, to $120trn to meet globally agreed targets.
Under its Green Deal, the EU will need to invest €350bn more annually between 2021-2030 than it did between 2011-2020. This is an increase of around €90bn per annum compared to the investments needed to achieve current 2030 climate and energy targets. A lot of investment will go into technologies and companies that contribute to at least one of six pre-defined environmental objectives as defined by the EU.
Investors attracted to the clean energy theme have an increasingly wide choice of funds and ETFs to invest in, from highly concentrated approaches to broader strategies that capture a more diversified set of opportunities. As the clean energy space is rapidly evolving, it is important for investors to understand whether the fund or ETF they are considering is able to adapt effectively to the changing landscape.
In March this year, Invesco launched its low-cost Invesco Global Clean Energy UCITS ETF, for instance, which, by aiming to track the WilderHill New Energy Global Innovation Index, follows the performance of companies focused on the generation and use of cleaner energy, energy conservation, efficiency and the advancement of renewable energy. It currently has well over 100 stocks, providing exposure to large, medium and smaller companies focussed on one of seven clean energy sectors.
Climate policy around the world is driving an accelerating shift to clean energy with very ambitious targets: over the past year we’ve seen unprecedented commitments from major economies to reach for carbon neutrality. These targets will require significant investment in renewable energy, leading to potential very strong growth opportunities for the clean energy sector across the entire supply chain.
Christopher Mellor is head of EMEA equity and commodity ETF product management at Invesco. The views expressed above are his own and should not be taken as investment advice.