Renewable energy funds Profile of a sustainable investment

All the important information about renewable energy funds and what to look out for as an investor.

The fact that sustainable investments are now also pioneers on the financial market can be seen in the steadily increasing number of sustainable financial products and solutions. What began as a niche trend is transforming many industries, such as the automotive industry. Investors now have almost unlimited opportunities to invest their money not only profitably, but also sustainably.  

For example: renewable energy funds. Until now, direct investments in renewable energy generation projects have mostly been reserved for an exclusive clientèle with high entry-level amounts. Renewable energy funds, on the other hand, make investing in sustainable climate protection projects accessible to retail investors starting at relatively low amounts. 

Investing in renewable energy not only offers investors the opportunity to invest sustainably – but also to gain access to a future-proof and promising asset class. With the move away from coal and other fossil fuels, renewable energies play a key role in meeting the still increasing demand.  

The importance of renewable energies is correspondingly great for business and politics. And this also increases interest in the financial market: the renewable energy segment now also offers attractive investment opportunities for retail investors – for example in the form of renewable energy funds, which are worth taking a look at in this article.

Renewable energies have a number of advantages: they are clean, available almost without limits and free from harmful substances and greenhouse effects. But what exactly falls under the category of renewable energies? Here you will find an overview of the different types of sustainable energy sources.

Windmills are no longer used as sawmills or oil mills, but have been repurposed for power generation. Wind farms currently make the largest contribution to the production of renewable electricity.

These turbines use the lift produced by the wind, which drives the rotor blades and in this way produces green electricity. Wind farms are categorised either as onshore or offshore wind farms. Onshore wind farms are situated on the mainland, while offshore turbines are installed on the sea and can generate more efficient electricity through significantly stronger wind flows.

Energy from sunlight is environmentally friendly, free and virtually inexhaustible. Two types of energy can be obtained from sunlight: electricity and heat.  

In theory, the energy of just 90 minutes of solar irradiation on the Earth is sufficient to cover the entire global energy demand for an entire year. However, state-of-the-art technologies can only provide a fraction of this energy as electricity and heat. However, this does not mean that solar energy has no potential – on the contrary – there is a steady increase, especially in German households that obtain energy from solar power plants.

Biomass includes plants, wood, straw, organic waste or liquid manure. What do they have in common? They all store energy that can be released by combustion or fermentation (for biogas). This means that biomass is available around the clock – compared to wind or solar energy, for example, which depends on sunshine and sufficient wind movement for energy production.  

Biomass is therefore particularly flexible and can also reduce energy costs as waste materials from other industries, such as feed and food production, can be used to produce bioenergy.

Water has also played an important role in energy production for more than a thousand years: even in the times of the Roman Empire and ancient Egypt, the power of flowing water was used to drive grain mills, for example.

Until 2004, hydropower was considered the most important source of renewable energy, but was then replaced by wind power. Nevertheless, it has not lost its importance and is still regarded as a vital source of renewable energy. Hydropower accounts for almost half of the global capacity for generating electricity from renewable sources.¹

Until the turn of the last millennium, electricity generation from renewable energy was considered niche. Only hydropower showed a steady value, but other power generation methods had not yet become established. Shortly thereafter, an almost exponential increase in the development of technologies for sustainable energy generation started.

Between 2015 and 2020 alone, the share of renewable energies in the German electricity mix increased from 29% to 45%. Onshore wind farms in particular have accounted for a solid 41% in electricity generation from renewable energy sources.

With around 187 billion kilowatt-hours, renewable energies accounted for 29% of Germany’s gross electricity generation in 2015. Their share of electricity consumption was 31.6%.  

With 234 billion kilowatt-hours, renewable energies contributed around 40.2% to German gross electricity generation in 2021. Wind power, biomass and photovoltaics are the three most productive energy sources. Overall, the share of renewable energies in gross electricity consumption was around 41%. 

In the first six months of 2022, the share of electricity from renewable energies even increased: of the approximately 252 billion kilowatt-hours of electricity produced in the first half of the year, around 130 billion kilowatt-hours can be attributed to renewable energies. This corresponds to an electricity share of approx. 51.6%.⁶

Renewable energy funds belong to the category of sustainable thematic funds. Investing money in these funds, will support projects within specific thematic areas, such as cleaning up the oceans or the reforestation of forests – or even the use of renewable energies.   

In principle, renewable energy funds can be divided into open-end and closed-end, or mutual, funds:

A closed-end fund sells a capped number of units to a small group of investors within a specified period of time before it is closed to further investment. These funds usually finance one or a few projects. For example, if it is a closed-end solar fund, investors’ fund assets flow into a specific solar park. 

While such investments offer high potential returns, they also involve high risks: as sustainable energy generation projects depend on specific environmental factors such as sufficient sunshine or wind, natural disasters or location-related miscalculations can cause losses.  

In addition, the capital in closed-end funds is usually tied up longer, so that investors can expect long maturities of 10 to 30 years. As the number of investors is limited, quite high minimum contributions are required, ranging from around 5,000 euros to six-digit amounts. Renewable energy funds are usually closed-end investments.

In contrast to closed-end funds, units in open-end renewable energy funds are issued via the responsible fund company. These units can be purchased at any time and without limitation. In the event of a sale, these companies redeem the units at the redemption price. In addition, open-end funds are often traded on the stock market. This means that investors also have the opportunity to participate in the fund via shares listed on the stock exchange. The purchase and sale of units in open-end funds is therefore easier and more flexible than in closed-end funds.

Renewable energy funds usually invest in a large number of projects at the same time, covering different regions and energy production methods. As a result, funds such as these have a higher degree of diversification, which contributes to broader risk diversification.

Currently, only a few open-end renewable energy funds are available on the financial market; one such open-end fund is the klimaVest impact fund from Commerz Real. klimaVest invests the fund’s assets in more than 25 wind farms and solar parks, spread across three countries. So with just one investment, investors can invest in a variety of assets at the same time.

The different types and production methods of renewable energy are also associated with different opportunities to invest in renewable energy.

Renewable energy funds are not the only way to invest in renewable energies per se. Investors also have the opportunity to participate indirectly in sustainable energy generation. For example, they may invest in equity funds that have sustainable companies focusing on renewable energies in their custody account.

Other options are bonds or renewable energy ETFs that promote sustainable energy production. In ETFs, investors benefit from the fact that the total expense ratio (TER), i.e. the fund’s total costs, is typically lower as they are not actively managed.  

However, investors should be cautious about such funds, because actual sustainability is not guaranteed in these investment opportunities. Particularly in the case of widely diversified funds such as equity funds or ETFs, companies that have been selected as sustainable investments using a best-in-class approach, for example, repeatedly end up in the portfolio.

But that doesn't mean much, because these can be companies in the fossil fuel industry, for example, which are only considered sustainable in comparison with their competitors. Attaching particular importance to the sustainability of the investments entails making significant compromises on products that are more widely diversified.  

This brings us closer to the next question on renewable energy funds:

Sustainability is not a protected term, so neither investors nor providers need to follow a common definition. For many, sustainability means the same as protecting the climate, while others already place far higher demands on the concept of sustainability. 

That is why, in the 1987 Brundtland Report, the United Nations defined sustainable development as one that meets the needs of today’s generation without jeopardising the needs of future generations. In addition to pure climate and environmental protection, this also includes human rights, good working conditions and fair corporate governance.  

The ESG criteria, which have now become the standard of sustainable economic activity in the financial sector, therefore include not only environmental, but also social and governance criteria.  

Therefore, if renewable energy funds are to be assessed for their environmental sustainability, the focus is on the E in ESG, i.e. with an emphasis on environmental factors. 

The sustainability of a renewable energy fund can also be assessed by looking at its measurability and goals, because the production of electricity or heat can be measured fairly accurately. However, fund providers often do not set specific goals for how much electricity is to be generated or how much pollutant is to be saved. As a result, there is also a lack of communication to investors who do not have a precise overview of the actual impact of their investment. 

Impact funds therefore offer a good opportunity for sustainable investment as they measure, document and communicate their impact on the real economy.

Sustainable investments may be good for your conscience, but how do they affect your wallet and your potential returns? Find out the main advantages and disadvantages of renewable energy funds that can help you make your investment decision here.

perhaps one of the biggest benefits of renewable energy funds: with the long-term promotion of renewable energies, they offer an answer to the rising demand for electricity.

With the decision to phase out coal and nuclear power, the share of renewable energies, which will be responsible for a large proportion of electricity generation and supply in the future, is set to be 65% by 2030. On the one hand, the economy is becoming less dependant on expensive oil imports or fuel generators and, at the same time, is promoting the expansion of a long-term, sustainable and therefore also promising energy supply.  

Investing capital in sustainable power generation also supports the development and operation of green tangible assets. As an investor in a closed-end fund, you invest in a company and are therefore one of the owners of solar parks or wind farms, for example. This means that you make a direct positive impact on the real economy.  

The expansion of systems for sustainable power generation is also supported by law. With its feed-in priority, the German Renewable Energies Act (EEG) ensures that electricity from renewable energies is fed into the electricity grid and consumed on a preferred basis. To this end, electricity grid operators are obliged to give priority to feeding electricity from renewable energy plants into their grid.

The more renewable electricity is produced, the less electricity from fossil fuels flows into the electricity grid. This secures the price of electricity, saves CO2 and promotes sustainable power generation.  

In addition, tangible asset funds such as renewable energy funds often have the decisive advantage of being independent of the stock market – and therefore suffer significantly less from market fluctuations, inflation or exchange rate risks compared to conventional securities investments. Investments in tangible assets in the form of open-end funds are therefore more stable and generally offer a good and solid basis for a diversified portfolio.  

However, renewable energy funds also have some drawbacks that potential investors should be aware of:

As already mentioned, investments in sustainable energy production are exposed to special weather conditions and therefore also to specific risks: this is because as soon as the solar irradiation is lower than calculated or natural disasters such as flooding or storms occur, these investments and their investors face particularly high losses.  

In addition, the specific risks of closed-end funds are also brought to bear here. This is because co-owners of such plants not only participate in the potential returns, but also in the risks of the investment, which could extend to a total loss of the assets. For example, unforeseen repairs, disruptions to technical processes or supply bottlenecks can lead to operational downtimes or loss of yield for the energy generation plants. This also puts investors’ capital at risk.  

The long capital tie-ups of closed-ended funds are also disadvantageous for many investors. Although it is possible to sell your units on the secondary market to a so-called substitute investor, such transactions are usually associated with high losses.