Sustainable Investing: Adopting a broader view to the term “value creation”

By Joseph Saviour, Senior Analyst, Distributed Energy

The whole definition of what is value creation is rapidly changing. More and more companies are transitioning away from the singular focus of shareholder value creation and have learned to also appreciate the significance of value creation for entire communities and society.

Renewable Energy Investing, what does it mean?

Nowadays an increasing number of companies are attracted to sustainable investing. This is large because the idea that investors can improve society while seeking solid financial returns is rapidly gaining ground. In addition to this, the shift to sustainable portfolios and impact investing reflects growing public concern for the environment, social inequality, and the well-evidenced existence of climate change and its devastating consequences. The potential for strong financial returns on capital coupled with growing public concerns about the environmental implications of unsustainable business practices have been a catalyst in driving forward technological advancements and investments into alternative renewable energy resources such as wind, solar, and biofuels. Renewable energy investment, in a nutshell, is an environmental/socially responsible investment (SRI) specifically relating to investments into supporting companies that are focused on providing their customers with services and solutions by utilizing renewable energy resources.

Our company, Distributed Energy, has kept an eye on the mounting investor concerns surrounding the environmental and social issues in investment decisions made by their general partners (GP). In response to this, GP’s are scrambling to demonstrate that they are fully integrating environmental, social and governance (ESG) considerations at the investment committee level or are taking action to improve the ESG performance of their portfolios. On the other hand, the very nature of the investment decisions we’ve made at Distributed Energy, on behalf of our investors and the solutions we provide to our energy customers, have been ESG focused since our onset. This approach has been embedded in our core business model. To make this observation a reality, we have assembled a team with deep sector understanding, internal technical capabilities, and investment know-how across multiple technologies. Our overarching goal is to provide efficient, sustainable, and environmentally-friendly energy alternatives for our energy consumers in developing countries while generating top-tier returns for our investors.

What to look for when investing in renewable energy?

Greenwashing has unfortunately become a common business practice, especially now. It is the practice of making an unsubstantiated or misleading claim about the environmental benefits of a product, service, technology, or business practice. This dishonest form of self-promotion is largely driven by external pressures such as stricter environmental regulations, differentiating factor for competitive advantage, and from investor/public pressure for businesses to adopt more environmentally-friendly practices.

This aside, one of the biggest challenges investment companies that are looking to legitimately adopt sustainable investing practices face is finding the right investment approach for it and integrating it into their existing investment model. One reason for this is because investors and the media use the labels- ESG investing, social and responsible investing, and impact investing- interchangeably, blurring the boundaries between different aims. Equally important, as an investor, is understanding the company you are looking to invest in. Questions you need to be asking yourself are (a) How have they been performing financially?; (b) What is the team’s background, experience, and execution capability in the industry?; (c) How is the company unique?; (d) Do they have a rock-solid business plan; (e) Are there opportunities for growth in the current market they are operating in and finally; (f) Investor relevance. The last point is particularly important and should not be underestimated. If there are multiple connections between your investment strategy and the business investment structure, you are likely to get more deeply engaged and the investor “fit” becomes more obvious.

It goes without saying that the best investment opportunities in energy markets are with companies that have:

• business readiness i.e. proven track record of success in the energy field
• excellent execution and synergy capabilities
• local expertise and business partnerships in the area of operation
• dynamic market opportunity
• a strong narrative and a business model with a unique edge over competitors i.e. usage of innovative IoT’s

Moving Forward

Once you’ve done your due diligence, you’ll realise there are several options for investing in green energy, which vary for investors with different levels of risk appetite. While low-risk investments like solar PV projects are unlikely to go wrong once the system is installed and operational, it’s important to thoroughly review the Power Purchase Agreement (PPA) to ensure there is a clear investment structure. This brings me to my concluding point. While there are different kinds of renewable energy options available for investment, how does a potential investor determine whether to prioritise investments on solar energy or wind, or hydropower? This depends on scalability opportunities in the market; finding synergies among different players; understanding the relevance of your energy option and its applicability based on the current and future policies and regulatory environment; and finally, deliberating over the feasibility of one energy option over the other in terms of cost, efficiency, and practicality.

As we become increasingly environmentally conscious, more investments in this sector will address the environmental challenges we are currently facing. Being an early bird and investing in this field while it’s still picking up pace could be a winning strategy, with financial rewards; not to mention the ethical considerations as well.