Clean energy shines as climate index outperforms equities

Rising electricity demand, growing energy security concerns, the impact of climate change, and the improving competitiveness of clean technologies have combined to see clean energy make a remarkable return to favour with public market investors in 2013, according to a new report by HSBC.

In its latest Quarterly Index Review, released Wednesday, HSBC says its Global Climate Change Benchmark Index (CCI) has delivered a 19.8 per cent return year to date, outperforming the MSCI ACWI (All Countries World Index) by 2.7 per cent, and marking the first year since 2007 in which the climate sector has outperformed global equities.

The report notes that 2013 has also seen a resurgence in public market deals in the sector and investment flows – in particular, secondary-offering and IPOs – a trend HSBC connects with growing confidence in the climate sector.

“On a risk-reward basis, the Climate Change theme has outperformed global equities across all regions except North America in the year to date,” says the report. “The excess returns in Asia Pacific, Europe and globally have more than compensated investors for the additional risks they have endured.”

The report’s authors, HSBC analysts Joachim de Lima and Vijay Sumon, say Energy Efficiency & Energy Management (EEEM) shone through as the strongest performing sector for the year to date, posting a 29.3 per cent return. This was followed by Low Carbon Energy Production (LCEP) and Environment and Land Use Management (ELUM) which returned 15 per cent and 14.8 per cent respectively. The only sector to have posted a negative return is Climate Finance, down 4.3 per cent.

In the LCEP, wind and Solar are highlighted as two of the strongest performing themes, up 72 per cent and 65 per cent respectively (see graph below). 2013 is also the first year since 2010 that both wind and solar have registered positive returns.

Interestingly, the report also notes that “pure-play” companies – those with more than 50 per cent of their revenues from climate relevant activities – have been the strongest performers in the HSBC Global CCI, up 30.7 per cent for the year to date, compared with 16.1 per cent returned by non-pure play companies (see Fig 11).

Around the world, Europe was noted as among the strongest performing regions in 2013, with its CCI up by 21 per cent. The report notes that this is “despite the fact that most countries are in the throes of revising their energy strategies with many having already cut support and in some cases subsidies having been eliminated altogether.”

After underperforming in the first half of the year, Europe bounced back strongly in the second half and now ranks second only to North America, which has returned 24 per cent, says the report. Europe has also outperformed the HSBC Global Climate Change Index by 1 per cent, the MSCI ACWI by 3.7 per cent and MSCI Europe by 4.3 per cent for the year to date. (See fig 22 below).

On a local note, Meridian Energy was this year added to the Index’s Asia Pacific region (see table below). And while this is a New Zealand energy company, it is an important player in the Australian renewables market, with deep enough pockets to invest in Australia’s sometimes fickle market without having to lock in a long-term offtake agreement.

Indeed, Meridian Energy Australia has done just this with the 64 turbine Mt Mercer wind farm near Ballarat in Victoria – which started producing electricity from some of its turbines last month. The Kiwi company forged ahead with the $260 million project despite not having a power purchase agreement (PPA) with a local energy utility. As we wrote, back in September 2012, once in full swing, the 131MW facility will be one of the largest to be built in Australia without a PPA. But in the end, Meridian didn’t want one.

The company is also considering whether it wants to set up its own renewable-energy focused, vertically integrated company in Australia and establish a new energy retailer called PowerShop – as a challenge to Australia’s big three incumbents.