Advisors, you've probably heard this before and heard quite a bit of it in recent months: Renewable energy stocks are soaring because of candidate/President-elect/President Joe Biden.
Indeed, the S&P Global Clean Energy Index nearly doubled for the six months ending Feb. 4. Biden pledging to spend $400 billion on renewable energy projects over 10 years and the push to get to net zero emissions by 2050 are obvious catalysts.
Undoubtedly, those are compelling factors. So is the $2 trillion the new president would like to spend overall on green energy. With big numbers like that, it's easy for clients to get wrapped in the notion that the U.S. is the only credible outlet of investing in renewable energy. That's not true and advisors can add value by having international clean energy conversations with clients.
This a great avenue for advisors to engage younger clients because their longer time horizons are conducive to taking on some risk with ex-US equities and the millennial and Gen Z demographics more actively prioritize environmental sustainability in investments than their Baby Boomer counterparts.
China is a premier destination for asset allocators looking to serve clients' international renewable energy desires. That makes sense because the world's second-largest economy has severe pollution problems, stoking its green energy ambitions and needs. Additionally, China is one of the most accessible, investable countries for U.S. investors when it comes to dedicated clean energy exposure.
China Clean Energy Goals: Where Ambition Meets Potential
As noted above, China has substantial renewable energy needs. This is relevant for advisors and investors because as the recent Climate Ambition Summit confirms, Beijing recognizes the need and is willing to commit capital.
“One of the commitments announced during the summit was to bring total solar and wind capacity to 1,200GW by 2030 from the current approximate level of 455GW capacity (227GW wind and 228GW solar),” according to KraneShares research. “To meet these goals, China will have to initiate an average of 70-80GW of new solar and wind installations per year over the next nine years.”
What's interesting about those projections is that while China is already a voracious consumer and producer of renewable energy, it's not yet as heavily engaged in solar and wind – the dominant forms of green power in the U.S. and Europe.
“Analysts believe these targets are not very aggressive and will be overachieved. Although China is now the world’s largest producer of renewable energy, solar and wind remain only a tiny portion of China’s energy generation mix (3% of energy is generated by solar versus 6% by wind). They are expected to take a more prominent role in the next ten years,” notes KraneShares.
Adding to the allure of China as a destination for green energy adoring clients is that it has a way to go to, well, cleanup its act relative to developed economies such as the U.S. and Europe. For example, event today 62% of China's power comes from dirty coal-fired plants, a percentage that's well above what's found in the U.S. and Europe.
Sun Starting to Shine on China Solar Industry
Declining costs are paving the way for increased corporate and residential solar adoption around the world, including China.
“According to Bloomberg, the global average cost of solar energy has declined by more than 80% since 2010, and we could see another 25% drop by 2025,” says KraneShares.
Advisors looking to track this trend and more in basket form can evaluate the MSCI China IMI Environment 10/40 Index. This is not investment advice, but that's the underlying index for the KraneShares MSCI China Environment Index ETF (NYSEARCA:KGRN), an exchange traded fund that returned more than 180% for the 12 months ending Feb. 4.