Renewable energy equities have been under pressure recently, facing tough and volatile market conditions as a confluence of factors have weighed on the sector, including tightening financial conditions, higher input costs, and supply chain challenges. However, we see reasons to consider renewables and sustainable infrastructure stocks over the medium term, positives that we believe the market is missing.

The global transition toward renewable energy is still in its infancy, with public policy everywhere supportive of this megatrend. The global renewables build-out will take decades, and near-term elevated interest rates will not derail it, in our view. Some of the more tenured companies in this industry have faced challenges like inflation and higher interest rates before. As in all capital-intensive businesses, we believe the best operators find ways to navigate changing conditions.

We think renewables valuations are very compelling, particularly as we near the end of this interest rate tightening cycle. Valuations across wind and solar names appear attractive, with most European companies trading at or near replacement value. In addition, recent take-private transactions in the mergers and acquisitions (M&A) market highlight a stark disconnect between implied valuations in the public market and much higher final prices in the private asset sale market, where multiples are higher. We’ve seen full companies being taken private at a 45% premium over listed prices, or individual assets being bought at up to 2x the implied value of the assets. 

Solar costs keep coming down, with panel prices cheaper than ever. Overcapacity in China and restrictions related to Chinese exports to the U.S. have led to a flooding of the market with excess panels. We believe this has made solar energy the most competitive and most affordable energy source today.

The renewables and sustainable infrastructure universe is not homogeneous. It is not solely comprised of power generators, wind turbines and solar panels, for instance. Waste management companies tied to the concept of a circular economy are also vital to a transition toward a global economy that minimizes raw materials use and the creation of pollution and waste.

We believe these companies can offer diversification to a renewables portfolio, acting as a resilient, less correlated complement to pure-play renewables more negatively impacted by inflation and rates. In addition, we believe tremendous opportunities exist among the best renewables operators in general that are positioning themselves for the other side of the current rate environment.

To capture the opportunity we see in listed renewables and sustainable infrastructure stocks today, we believe an active approach with an infrastructure focus is key. An active manager can invest in the most compelling opportunities at any point in time, while managing risk effectively via a focus on companies with monopolistic business models, steady cash flows and long-term contracts with inflation escalators built in.

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