Sustainable Energy - September Commentary

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‘Back to school’ for sustainable energy

Supportive supply cost and investment trends confirm that the global energy transition is continuing and, with US clean energy policy now clarified, sustainable energy equities have started to perform. In this ‘back to school’ piece we review the key sectors in the Guinness Sustainable Energy Fund and see an earnings growth outlook that sits at odds with the sector’s depressed valuation levels.

Global energy transition goes on, despite US headwinds

The global clean energy industry has suffered over the last 18 months due to the nomination and election of Donald Trump as President of the United States and the subsequent passing of his “One Big Beautiful Bill” (OBBB). With support for the US clean energy industry under pressure, you would be forgiven for thinking that the global energy transition has stalled. We would argue quite differently and suggest that we are still in the very early stages of the secular energy transition trend of growing renewable/low-carbon energy supply and the electrification of global energy demand. Wind and solar are growing faster than any prior form of power supply, while the electrification of the world energy system is leading to sharply positive revisions for power demand. The energy transition is just getting into its stride.

Annual global power generation after exceeding 100 TWh in a year

Source: Nat Bullard; EMBER; Guinness Global Investors, 2025

Despite the passing of the OBBB and Donald Trump’s ‘Liberation Day’ tariffs, sustainable energy equities have outperformed markets year-to-date, with the Guinness Sustainable Energy Fund up 19.3% (in USD) to 31 August 2025, outperforming the MSCI World Index (up 13.8%). We believe this performance generally reflects:

• The strength of electrification theme: the world waking up to the level of investment needed to expand and modernise the power grid, and to meet new power demand;
• In Europe, real investment being added to green rhetoric, with Germany’s new infrastructure spending including significant sums earmarked for clean energy; and
• The outcome of Trump’s OBBB being not as bad as many feared; its passage may well be seen as a significant clearing event.

No doubt the OBBB makes clean energy development in the United States tougher than under existing Inflation Reduction Act provisions, but its effects are likely to be nuanced. As expected, EVs and offshore wind were relative losers in the OBBB, but clean energy equipment manufacturing was a relative winner. Uncertainty around the outcome had forced many clean energy developers to stall their developments (nearly $19bn of clean energy projects have been cancelled in 2025, most in the lead up to the OBBB, according to Atlas Public Policy’s Clean Economy Tracker) but activity is now starting to recover. In recent days, the US Treasury has confirmed that projects started by July 2026 will have up to four years to “safe harbour” tax credits (much later than many feared), so there is a reasonable chance the projects get quickly restarted and equipment orders start to recover from here.

With the tax credits now settled, we expect the market to focus more on the issues raised by surging electricity demand growth in the US, thanks to data centres, AI and the reshoring and electrification of industry. This inflection in electrification is likely to keep demand strong for new renewable power (as it is more economic and faster to market than other forms) and we expect renewable power purchase agreements (PPAs) to continue to inflate. Growth in demand is very likely to highlight weaknesses and the need for significant investment in the US electric grid.

Looking beyond the US, we continue to see positive energy transition trends. In Europe, Germany’s new infrastructure spending (EUR100bn earmarked for clean energy within EUR500bn total infrastructure spend) provides earnings growth potential for our companies, while the UK announced further EV support and South Korea introduced its own ‘Inflation Reduction Act’ to support the development of clean energy. Meanwhile, China has continued determinedly with its broad-based electrification strategy and we saw some early signs that the government is starting to address the significant oversupply in some clean energy manufacturing industries.

There have been numerous headwinds and tailwinds for global clean energy policy over the last few years and there are likely to be more in the years ahead. We urge investors to concentrate on industry activity, and we continue to find that project cost data and global clean energy investment data give us confidence in the economic rationale for renewables.

Recently published data from IRENA, based on real projects commissioned across the world in 2024, showed that the levelised cost of electricity (LCOE) of solar and wind remained broadly flat last year, keeping both firmly at the bottom end of the cost curve. We believe that this cements the attractiveness of both energy forms, since these data points now include the effects of post-COVID supply chain issues, raw material cost inflation and the effect of higher interest rates. The flat supply cost profile of wind and solar contrasts with gas-fired power, where the cost of a gas turbine has increased 2.3x since 2022.

Global LCOE of newly commissioned utility-scale renewable power technologies (2010–2024)

Source: IRENA, Guinness Global Investors, 2025

The recent World Energy Investment 2025 report from the IEA estimates that global investment in clean technologies remains on track to hit nearly $2.2tn in 2025, 10% more than 2024 and almost twice the spend on coal, oil and gas. Supporting this, in the first half of the year, research provider BNEF estimates that a record $386bn was invested in renewable energy projects (also up 10% year-on-year) with wind projects up 24% and solar up 5%.

In summary, then, energy transition continues to make economic sense. And while the strong equity performance this year reflects some relief after the passage of the OBBB, more importantly it reflects a continued economic supply cost advantage that is incentivising growing investment in the face of surging electricity demand.

The key themes in the Guinness Sustainable Energy portfolio

The Guinness Sustainable Energy Fund is positioned to benefit from numerous themes within the broader secular trend of the energy transition. We highlight eight such themes below:

Source: Guinness Global Investors. Data as of 31.08.2025

The electrification of the energy mix is the key theme in the transition, with electricity demand growing around 4% a year (increasingly displacing fossil fuels) and reaching around 60% of final world energy use by 2050. Electricity demand equivalent to 1.5 times the global oil industry is being created, and this is a challenge for many governments and companies that are not used to growth. While we see high growth rates for AI and data centre electricity demand, we note that the electrification trend is much broader-based and includes industry, buildings and transportation.

To achieve this, the global power grid needs to be modernised. Much of the western world’s power grid is 40-50 years old and over half of US grid transformers are over 30 years old. By 2040, we see estimates that over 50 million km of new grids and 30 million km of refurbished grids will be needed, equivalent to a doubling of the global power grid today. Grid spending rose 9% in 2024 and will need to grow from nearly $400bn in 2025 to $600m by 2030 and average $800m a year in the 2040s.

The rise of the electric vehicle should see the global transportation sector’s share of global electricity demand grow from less than 1% today to around 15% by 2050, representing a 50-times increase in electricity demand. China is leading the race with more than 50% of new car sales being EVs because the average battery EV is now cheaper than the average internal combustion engine (ICE) vehicle. Following the current ‘S curve’ will see China at 80% adoption of EVs in 2030 while still globally exporting low-cost vehicles than are more efficient that their ICE counterparts. Further reductions in the cost of battery manufacturing will support the transition towards EVs and power semiconductor demand will also rise.

Bottom-of-the-cycle conditions in clean energy equipment manufacturing will improve as demand for wind and solar power persists. Renewables represented over 90% of new power capacity installed globally in 2024 and renewables remain attractive either due to speed of delivery or cost of supply relative to fossil fuels. In solar, we believe that module prices have bottomed and that China may have some success in removing excess capacity for the industry. In wind, turbine prices have moved higher allowing manufacturers to stabilise margins. Both wind and solar manufacturing could see short-term demand spikes prior to the roll-off of tax credits in the United States.

Our low-carbon generation companies are well placed to benefit from rising electricity demand expectations and rising electricity prices. Urgency around electricity demand brings substantial opportunities for these companies to invest in either new renewable supply or substantial grid upgrades at attractive regulated or semi-regulated rates of returns. Rising prices in power purchase agreement and lower interest rates should improve their cash return spreads and equity valuations.

Lastly, our companies in building and industrial efficiency will be key beneficiaries of electrification. In the near term, lower US interest rates would certainly help to boost lagging home starts, but longer-term policy commitments and higher electricity prices are leading governments to bring in greater efficiency regulations, boosting the payback on efficiency upgrade projects that our companies are exposed to. By 2050, the need for efficiency is clear as electricity consumption from buildings will likely grow by 3.5 times and electricity consumption from industry will grow by 4 times.

Positive thematic reflected in attractive fund characteristics

In the Guinness Sustainable Energy portfolio, we believe that we have advantaged exposure to companies within these themes. Our basket of companies is projected on consensus estimates to deliver good earnings growth in 2025, in excess of the MSCI World. Benefiting from the strong tail wind of the energy transition, the fund has historically delivered earnings per share (EPS) growth in excess of the MSCI World (8.4% annually from 2019-2024 versus the MSCI World at 6.8%) and, based on current consensus expectations, it should return to that trend again. Including recent 2Q 2025 results, fund EPS is expected to grow at 13.3% per annum to 2026 (reflecting 9% growth in 2025 and 18% in 2026) while the MSCI World is expected to grow at 9.8% per annum to 2026 (reflecting 9% growth in 2025 and 11% in 2026).

Earnings per share (US$) for Guinness Sustainable Energy Fund and MSCI World index

Source: Company data, Guinness estimates, 31.08.2025

The cash return of the fund’s holdings (a measure of real economic return on capital employed) has moved higher over 2024 and 2025 and has now reached 11% for the median holding at the end of August 2025. This is result of improvements in the cash returns of various existing investee companies, plus some high grading of the portfolio. Looking back over the fund’s history, cash returns are now at a peak level and, for the first time since 2019, they are at a premium to the median cash return of the MSCI World Index.

Cash returns for Guinness Sustainable Energy Fund and median MSCI World index

Source: Company data, Guinness estimates, HOLT, 31.08.2025

Stock changes that we have made in the portfolio over the last 18 months (and in particular taking advantage of volatility following ‘Liberation Day’) have contributed to improved quality and greater end market diversification. This has reduced the historic volatility of the fund’s earnings but without sacrificing its pureplay clean energy exposure. The forthcoming edition of the strategy’s Impact Report highlights that the companies in our portfolio at the end of 2024 sold products and services that helped to displace 919 tonnes of CO2e (per $1m of portfolio assets) compared to the continued use of incumbent fossil fuel technologies. In 2024, the companies in the fund (on a 100% ownership basis) grew their carbon dioxide emissions avoided by 9%, thereby delivering a five-year annualised rate of 13%. Our analysis of business exposure suggests that the portfolio at the end of July 2025 had over 70% of green revenues from clean energy, very similar to the levels estimated for our portfolio from 2019.

Accordingly, the fund continues to pursue a pureplay thematic. Its active share with the MSCI World Index remains high, at 98.4%, and the 12-month rolling correlation between the daily performance of the fund and the MSCI World Index sits at 77%; less correlated than history and low in the context of global equity funds more broadly.

Despite growth potential, valuation still at a discount to the MSCI World

At 31 August 2025, the Guinness Sustainable Energy Fund traded on a 2025/26 price/earnings ratio of 19.4x/16.4x, while the MSCI World Index traded on 21.5x/19.4x. On a 12-month forward view, the fund trades at about a 13% P/E discount to the MSCI World Index, despite consensus forecast suggesting it will deliver superior earnings growth (13.4% a year vs the MSCI World at 10.2% a year).

Valuation and earnings growth of the Guinness Sustainable Energy fund 

This 13.4% annualised EPS growth implied by consensus today is lower than prior forecasts from 2021 and 2022 but comes from a more diversified end market exposure. Should this earnings growth play out, we would expect the fund’s 13% P/E valuation discount to the MSCI World Index to close and, potentially, move back to a premium reflecting the forecast earnings growth premium to the MSCI World Index.

12-month forward P/E relative of Guinness Sustainable Energy Fund vs MSCI World Index

Source: Guinness Global Investors (31 August 2025)

Conclusion

Increasing global electricity demand, a better-than-expected resolution to US policy, and supportive policy elsewhere in the world provide a backdrop for our companies that is better than anything seen in the last 24 months. Improvements in quality and diversified exposure to better structured end markets should allow fund earnings to grow in 2025 and 2026 and bring greater confidence in the longer-term earning potential. We believe that our basket of sustainable energy equities provides exposure to earnings growth in excess of the MSCI World at an attractive valuation discount to the MSCI World.

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