Sustainable Energy - April Commentary

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While tariff uncertainty continues to pressure global equity markets, we believe that clarity over the future of the Inflation Reduction Act (IRA) in the US and increased clean energy investment in Europe could act as key drivers for the sustainable energy sector in 2025. Despite elevated interest rates, energy transition investment continues to reach new highs, driven by surging electricity demand and major power consumers such as data centre owners increasingly turning to renewables to secure their long-term power needs. In this report, we discuss macro developments and fund performance from 1Q 2025 and conclude that the fund’s 1 year forward P/E discount to the MSCI World of 18% appears inconsistent with its expected superior earnings growth.

US tariffs and executive orders

On his first day in office, President Trump signed a flurry of executive orders affecting the energy sector. These included declaring a national energy emergency to relax environmental restrictions and streamline permitting, withdrawing from the Paris Agreement (again), revoking Biden’s 2021 electric vehicle (EV) targets, halting unspent government funds for EV charging stations, and suspending new federal leases for offshore wind projects. While the speed and quantum of his executive orders was impressive, the announcements were broadly consistent with his election campaign with few positive or negative surprises. Notably absent from his day one executive orders was any mention of plans to repeal the IRA itself.

Uncertainty over the future of the Inflation Reduction Act remains a key overhang for US renewables. While it would be unwise to provide firm predictions at this stage, we draw confidence from a letter sent by a group of 21 Republican lawmakers to the Ways and Means committee (which influences federal budgets) asking to preserve the IRA’s clean energy tax credits. As a reminder, a full-scale repeal of the legislation would require a majority in both houses, which the Republican party holds by only a slim margin. We expect to gain greater clarity on the future of the IRA in the Republicans first budget, thought to be sometime in the second quarter, and continue to believe that any bill where tax credits are not repealed in full is likely to act as a strong firming event for sector sentiment which is currently very depressed.

At the start of April, the US government has introduced broad tariffs, including a 10% universal levy on nearly all imports and additional “reciprocal” tariffs targeting countries with large trade surpluses with the US. While it is difficult to be precise about exposures and outcomes at present, the tariffs are expected to impact the industrial and automotive sectors the most. We believe the most instructive analysis is to look at the end-markets of our portfolio by revenue. Our portfolio has around 47% revenue exposure to the US (underweight the MSCI World which is at 51%), of which around 9% is exposed to US industrial and automotive end markets. In mitigation, many of our companies employ “in-region, for-region” manufacturing strategies to minimize cross-border tariff exposure; a sizeable amount of our exposure is via US electrification names which have strong capacity to pass tariff related costs through to end customers thanks to the current supply-demand imbalance; and experience of previous tariff cycles in 2018-2019 provided our companies with a playbook to navigate the current environment.

Guinness Sustainable Energy Fund revenue exposure by geography and end market

Source: Company reports, Guinness Global Investors (March 2025)

Europe

Over in Europe, February saw the European Commission introduce the Clean Industrial Deal, a policy aimed at boosting the EU’s clean manufacturing sector and industrial competitiveness. The plan includes adding 100GW of renewable energy capacity annually until 2030 and making €100 billion available to support energy-intensive industries such as steel, metals, and chemicals. The deal also proposes streamlining bureaucratic processes, increasing European Investment Bank-backed guarantees for renewable energy projects, and supporting power grid manufacturers. We will wait to see the results of this proposal, but it’s promising to see the commission take action given the bloc’s tendency to be “long” on targets, but “short” on actual support.

At the same time, there has been a renewed focus on ramping up defence spending in Europe. We would argue that energy remains one of Russia’s most powerful geopolitical weapons to use against Europe and we see the development of sustainable energy forms in the EU as enhancing energy security, supporting economic competitiveness and driving decarbonization. These strategic priorities were reflected in Germany’s recent debt brake reform, unlocking approximately €1 trillion in additional investment into defence, infrastructure and energy transition projects over the next decade.

Energy transition investment has risen

Global energy transition investment reached a new record high of $2.1 trillion in 2024, an 11% increase from the previous year. According to Bloomberg New Energy Finance, spending on clean energy projects has more than doubled since 2020 and is now nearly twice the level of fossil fuel investments. Growth was driven by investments in power grids, renewable energy, and electrified transport. China led the way with $818 billion in energy transition spending, while significant investments were also seen in the EU and the US. Notably, this surge occurred despite higher interest rates, demonstrating that electricity generated from renewable sources like onshore wind and solar remains cost-effective versus fossil fuels.

Global electricity demand is accelerating

IEA estimates for global electricity demand have been revised upwards in the first quarter of 2025. Having grown at 2.8% per annum between 2000-23, electricity consumption grew by an estimated 4.3% in 2024 and is expected to maintain a higher level of growth going forwards, averaging c.4% per annum until 2027. Emerging markets account for 85% of this growth, with China leading the expansion. The electrification of buildings, transportation, and data centres continues to drive electricity consumption, with electricity projected to account for 27% of total energy demand by 2030, up from 23% in 2023 and 18% in 2015. With this in mind, we believe the investment opportunity for the electrification of energy demand and the supply of sustainable energy will be significant for years to come.

Data centre demand

Data centre owners are increasingly looking to renewables to meet their growing electricity needs, helping to drive global corporate power purchase agreement (PPA) volumes to new highs. Total signed agreements exceeded 62GW in 2024, up 35% year-on-year. The top four buyers—Amazon, Google, Meta, and Microsoft—accounted for 40% of the total demand. Approximately 95% of these agreements were for onshore wind and solar, with predictable operating costs making them well suited for long-term contracts, offering hyperscalers with long term price visibility, a distinct advantage over fossil fuels. The increased demand has driven US PPA prices from $25/MWh in 2019 to over $60/MWh today, with prices exceeding $100/MWh for some geothermal contracts.

Outlook

Clarity on the future of the IRA is likely to be a key catalyst in the year ahead as would any funding announcements related to the EU Green Deal or European energy security. The sector would also be a beneficiary of looser monetary policy, lower inflation and lower US treasury yields while higher fossil fuel prices would further improve the relative economics of renewable technologies. We expect investor interest in sustainable energy equities to recover in 2025 reflecting these catalysts and we expect that the current attractive valuation level will act as a catalyst as well. We believe that the Guinness Sustainable Energy portfolio, chosen from our universe of around 250 companies, provides concentrated exposure to the theme at attractive valuation levels that are particularly attractive relative to consensus earnings growth expectations. 

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