4 ways to invest in the low-carbon economy

4 ways to invest in the low-carbon economy

From green bonds to renewable energy yieldcos, low-carbon investment options are growing.

Citigroup recently pledged $100 billion for lending, investing and facilitating deals related to sustainability, renewable energy and climate change mitigation.

This is yet another sign that global capital markets are enormously interested in delivering capital into clean, renewable sources of energy. But you don’t have to be Citigroup to invest in the clean energy future.

The industry’s rapid growth presents an interesting diversity of long-term opportunities for individuals like you and me who might be looking to make investments in a low carbon economy.

Fueled by an increased demand for solar and wind energy, clean energy investment last year beat expectations, rising 16 percent to $310 billion worldwide, according to Bloomberg New Energy Finance (BNEF).

Fortunately, this robust growth is representative of a general upward trend in clean energy investment over the past decade.

Although the vast majority of this money is coming from governments, corporations and private equity and venture capital firms, people and organizations at all financial levels can consider whether it is right for them to add clean energy to their investment portfolios.

You don’t need millions in the bank to make such investments — any investor can consider whether to put their money to use  through the four financial instruments described below.

1. Climate or green bonds

A bond allows entities looking to finance projects to borrow money from investors for a defined period of time at a fixed interest rate.

Climate or green bonds are used exclusively to finance new or existing climate/green initiatives, defined (PDF) by the International Capital Markets Association as “projects and activities that promote climate or other environmental sustainability.”

These bonds recently have experienced significant success and constitute a large chunk of financing for clean energy investment.

“These have been one of the great success stories of the past two years, increasing from a paltry $3 billion to $5 billion per year between 2007 and 2012, then suddenly jumping to $14 billion in 2013 and $39 billion last year," according to BNEF.

Future prospects are bright. BNEF expects to see further rapid growth in 2015, saying, “We see the volume of green bonds doubling again this year to around $80 billion.”

2. Equities

Equity is stock or any other security representing ownership in a company.

An investor who believes a company’s value will increase in the future might purchase equity, or shares of ownership, in that company via a stock exchange. This is a riskier option than a bond because if the company’s value decreases, the investor loses money.

Plenty of publicly traded companies operate in the clean energy space, such as solar panel manufacturers or battery storage developers.

While a number of market risks (embedded in any investment) need to be carefully evaluated when making an equity investment, selecting the right technology or venture to back can be very rewarding.

For example, Tesla is a publicly traded clean energy company whose stock price grew more than 40 percent to $222.41 on Dec. 31.

If an investor had purchased 100 shares Jan. 1, 2014, for about $15,000 and sold them on Dec. 31, she would have earned a hefty return of more than $7,000. For those who have no idea where to start, SustainableBusiness.com has compiled a “watch list” for green stocks and even has subcategories such as solar and wind.

3. Index funds

In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it.

Indices are often the basis of mutual funds and exchange-traded funds (ETFs). These index funds enable investors who want to get behind an industry, but lack confidence in their abilities to identify specific winning companies, to bet on the industry at large.

Clean energy index funds might include a broad spectrum of technologies and/or geographies, or they might focus on one technology and/or geography. Below are some examples of clean energy index funds:

PowerShares Global Clean Energy Portfolio: This ETF is based on the Wilder Hill New Energy Global Innovation Index (^NEX), which comprises 107 companies around the world for a broad spectrum of clean technologies.

This index fund “seeks to deliver capital appreciation and is composed of companies that focus on greener and generally renewable sources of energy and technologies facilitating cleaner energy.” The fund, as well as the group of companies included in the index, are rebalanced and reconstituted on a quarterly basis.

Guggenheim Solar ETF: This ETF, based on the MAC Global Solar Energy Index, includes companies distributed across the solar energy value chain, including the manufacturing of solar equipment and the financing, development and operation of projects.

4. Yieldcos

BNEF defines a yieldco as a “publicly traded company whose main purpose is to buy and hold operational assets and pass the majority of its cash flows to investors in the form of dividends.” In other words, individuals can buy shares in yieldcos, which are investments in specific assets that already are constructed (a solar power plant owned by another company).

An attractive feature of yieldcos is they typically do not take on development or construction risk, which is borne either by the parent company or a third-party developer. Those who invest in yieldcos are paid back via dividends that derive from the profits of the asset.

A number of companies recently have created yieldcos for clean energy assets, including NRG Energy, Pattern Energy Group, NextEra Energy, Abengoa SA and TransAlta Renewables.

Global solar energy company SunEdison’s new yieldco, TerraForm Power, raised $350 million in an initial public offering (IPO) in July and is planning to release an IPO for a second yieldco focusing on clean energy assets in Africa and Asia this year. And recently, the two largest U.S. solar-panel manufacturers, First Solar and SunPower, created waves when they announced plans to create a joint-venture yieldco.

An added bonus to clean energy yieldcos: Those that own renewable resources can use the tax benefits associated with clean energy investment to lower their taxes.

A lot of money has been made (and a fair amount has been lost) through the clean energy industry over the past decade, and the surplus doesn’t need to be limited to major conglomerates such as Citigroup.

Making any investment can be a very risky proposition. Anyone considering an investment in any alternatives described here first should speak with a registered financial/investment advisor to make certain all risks are fully understood and that an investment is appropriate to the investor.

Green bonds, equities, index funds and yieldcos are just a few instruments that empower people to capitalize on this trend, while helping to fund the clean energy future.

This article originally appeared at the Environmental Defense Fund's Energy Exchange blog.