Ian Cowie: how I am playing the ‘green industrial revolution’

Our columnist has bought an investment trust to increase exposure to renewable energy. 

Green is the new black for followers of financial fashion while renewable energy investment trusts typically trade at double-digit premiums above net asset value (NAV). But inflation-busting income, hopes of growth and state stimulus on a massive scale might justify paying over the odds to buy into a big theme of the future.

Here and now, ITM Power (LSE:ITM) a Sheffield-based maker of “green hydrogen”, is the star performer in my modest portfolio this year, after trebling its share price since January. That’s when I paid £1.24 for shares, which trade at £3.77 this week.

Without wishing to sound smug, this is a good return in a bad year when the coronavirus blighted many other businesses and stock-market indices. But individual trading companies can prove high-risk binary bets, or in plain English, a bit hit or miss.

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So, earlier this month, I increased my exposure to renewable energy by buying into a newish investment trust: sterling-denominated shares in US Solar Fund (LSE:USF) at 79p each. This week USF, which launched in April 2019, announced that its 41 solar farms across California, North Carolina, Oregon and Utah are now fully operational and generating 443 megawatts (MW) of electricity.

That means the 1.9% yield still shown on the Association of Investment Companies (AIC) website may soon understate the income paid to shareholders, which should be nearer 5.5% next year. Gill Nott, chairperson of USF and a former deputy of the AIC, explained:

“All the company’s solar plants are generating power, putting us firmly on track to pay and cash-cover the full target dividend of 5.5 cents per share in 2021.”

It doesn’t matter if you are a climate change-denying carnivore in a gas-guzzling car or a tree-hugging vegan who asks “What would Greta do?” before getting on your bicycle. It is time for investors to consider joining the “green industrial revolution”.

There’s no need to take my word for this because that’s what British prime minister Boris Johnson calls his £2 billion plan to cut pollution. More importantly, the incoming American president Joe Biden has proposed an eye-stretching $2 trillion (£1.4 trillion) stimulus to promote renewable energy.

So cynics who shun green shares are not only breaking Mr Market’s golden rule – “Don’t fight the Fed”, but also bravely daring to differ from many other major economies. For example, the European Union has awarded €4 billion (£3.5 billion) in renewable energy grants since 2014 and last month allocated another €998 million to develop wind power in the North Sea.

Speaking of which, Orsted (ORHE), the world’s biggest operator of offshore wind farms, is another recent addition to my green portfolio. Last month, I paid Danish krone 953 for shares that trade at DK 1,078 this week.

Meanwhile, less risky and more diversified exposure to renewable energy is obtained through Ecofin Global Utilities & Infrastructure (LSE:EGL). I paid £1.52 in September last year for shares that currently cost £1.82 ex-dividend and yield 3.7%.

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Interestingly, this £196 million investment trust, with a quarter of its assets in renewable energy, is listed in the AIC’s small and somewhat obscure “Infrastructure Securities” sector. That technical factor may explain why it is priced at a modest premium of 0.7% to its NAV.

By contrast, investment trusts in the bigger and higher profile “Renewable Energy Infrastructure” sector trade at an average premium of nearly 14% above their NAV. The three top performers in this sector over the last five years are Renewables Infrastructure Group (LSE:TRIG) with a total return of 72%, Bluefield Solar Income (LSE:BSIF) with a return of 65%, and Greencoat UK Wind (LSE:UKW) with 57%.

Meanwhile, this triumvirate of investment trusts trade at premiums to their NAVs of 16%, 14% and just under 10%, respectively. To return to the scepticism with which I began this article, it is questionable whether such pricing for perfection is justified by one-year returns of 4.4%, -1.4%, and -4.9%, respectively.

So some caution about premiums to NAV are justified in such a popular sector. It doesn’t matter whether you are talking about suits, socks or shares; nothing fades as fast as fashion.

More positively, ITM has energised my portfolio in a pandemic-depressed year, while EGL and ORHE have both made early gains. With Biden preparing to enter the White House and the UK due to host the 26th United Nations Climate Change Conference (COP26) next November, I suspect there may be further to go.

Ian Cowie is a shareholder in Ecofin Global Utilities & Infrastructure (EGL); ITM Power (ITM), Orsted (ORHE) and US Solar Fund (USFP) as part of a diversified portfolio of investment trusts and other shares.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

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