Time to go green as oil crisis looms?

This short-term boost should also be accompanied by longer-term positive impacts for the renewable energy sector from this crisis. The chaos threatened by rising oil prices is a reminder of the world’s dependence on “black gold”, which will encourage policymakers in many countries to accelerate adoption of renewable energy, already being developed at pace in the context of climate change.

Moreover, a higher oil price means renewable energy is currently more cost-competitive. That should lead to increased investment in a sector that in the past at least has often depended on subsidies and tax incentives from taxpayers.

Not that current events should be regarded as a slam dunk for the renewables sector. For one thing, the sector’s supply chain does depend on oil to some extent, as part of the manufacturing process for assets such as solar panels and wind turbines.

A bigger worry is that some economists are now forecasting higher interest rates, arguing that central banks may be forced to tackle the rising inflation that higher oil and energy prices are bound to lead to. Renewable infrastructure projects carry a significant exposure to interest rate risk. The sector’s high upfront costs require infrastructure developers and operators to take on significant amounts of debt; any rise in the cost of finance therefore spells bad news. This is far from a certain outcome, however, as most central banks will be reluctant to raise rates into a slowing economy and potential energy crisis.

For the time being, investors in investment trusts offering exposure to renewables do seem to be focusing on the more positive arguments. Funds such as Foresight Environmental Infrastructure and Greencoat Renewables have posted gains of between 5% and 10% over the past two weeks.

It should be pointed out that this is a sector that has had its difficulties. Looking back over the past five years, many funds have lost money. That largely reflects the higher interest rates in force during much of that period, but it’s a reminder that while infrastructure investment provides diversification away from conventional asset classes such as equities, returns won’t always be positive.

Still, the long-term outlook for the renewable energy sector is exciting. In a world that desperately needs more power, but which must reduce the size of its carbon footprint, demand for solar, wind and hydro will only increase. It’s a structural theme that looks set to dominate for decades to come.

And, of course, investment trusts are the only straightforward point of access to renewable energy for most investors. This is not an asset class where you can invest direct as a retail investor, other than through some very niche opportunities. Buying exposure to the sector via an investment trust, on the other hand, gives you professional management and the benefits of a structure well suited to illiquid assets such as renewable energy infrastructure.

In that context, the crisis in the Middle East might be seen as a nudge to take another look at renewable energy funds – particularly since shares in many of them currently trade at attractive discounts to the value of their underlying assets. Avoid a kneejerk reaction to what we’re seeing in these febrile times at all costs, but the long-term case for renewables is compelling.