Sustainable Energy - July Commentary

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The first half of 2025 saw a scaling back of the Inflation Reduction Act (IRA) as part of Trump’s One Big Beautiful Bill and, with it now behind us, we expect the US clean energy industry to return to investment mode again. Clarity over the IRA, together with more European policy support, an improving macro environment and resurgent electricity demand growth allowed the sector to outperform the broad equity market over the period and we see reasons for cautious optimism in the second half. In this report, we review 1H 2025 macro developments and fund contribution and conclude that the fund’s 1-year forward P/E discount to the MSCI World of 15% appears to excessively discount its superior earnings growth.

The first half of 2025 saw the Guinness Sustainable Energy Fund delivering a total return (USD) of +11.7%, outperforming the MSCI World Index (net return) of +9.5%. The key events that have affected the energy transition, company profitability and share price performance so far this year are discussed below:

The backdrop to the global energy transition in the first half of 2025 has been dominated by policy; with the United States delivering a disappointing downsizing of the Inflation Reduction Act (IRA) and tariff uncertainty, while Europe provided leadership and direction in the energy transition.

In the United States, the budget reconciliation bill of May 2025 initially proposed fewer changes to the IRA than expected after President Trump's election. However, amendments by the House of Representatives in late May reduced the value of IRA credits, raising around $570bn. The resulting One Big Beautiful Bill eliminates electric vehicle and residential solar tax credits and speeds up the phasing out of utility solar and wind investment and production tax credits (ITC and PTC). On the positive side, manufacturing tax credits for battery and solar equipment will last until 2032 (beyond previous expectations) with wind credits set to end in 2027. While the new bill is less favourable for clean energy, its passing will provide project developers with the certainty needed to plan and proceed. Our dialogue with manufacturers and developers indicates that the planning scenario for many following the Trump election was for a full repeal of the IRA and that little activity would occur whilst the bill was under consideration. With this hurdle now cleared, we expect to see a resumption of activity in the US, from what we see as an encouraging base level of activity, unabated by recent policy headwinds.

US Clean Investment (Energy, Vehicles, Building Electrification) continues to grow, in spite of policy headwinds

Source: Rhodium Group / MIT-CEEPR Clean Investment Monitor, 2025

In contrast, European policy has been supportive of the energy transition this year. In February the European Commission introduced the Clean Industrial Deal, a policy aimed at boosting the EU’s clean manufacturing sector and industrial competitiveness by 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. In addition, Germany’s debt brake reform (Feb’25), unlocks approximately €1 trillion in additional investment into defence, infrastructure and energy transition projects over the next decade. Importantly, the case for renewables investment in Europe has not been shaken by the Iberian blackout in April 2025, with the cause believed to be poor load control and frequency management, rather than the high share of solar (55%) deployed at the time.

In spite of the trade and policy uncertainty, the fundamental macro backdrop in the first half of 2025 has proved to be fairly supportive of the sector. Interest rate cuts have continued in Europe, as inflation remains well under control. In the US, rates remain flat year to date at 4.5% (down c.100bps vs. Jun’24) and US Inflation has trended downwards year to date (2.3% in May’25 following a resurgence in Q4’24) creating some capacity for further interest rate cuts.

This backdrop has been somewhat overshadowed by the uncertainty, inflationary, and recessionary pressure introduced by the swathe of tariffs threatened by the Trump administration in its ‘Liberation Day’ announcements in April. Although the extraordinary headline tariffs have been delayed and reduced, uncertainty persists, and some consequential tariffs will certainly be implemented. A blanket 10% tariff is in effect on all goods, other than some Canadian and Mexican exempted imports, alongside 50% on steel and aluminium products and 25% on cars and auto parts. Chinese goods face a 30-55% tariff, with further tariffs facing a 90-day pause following the Geneva trade negotiation in May. We are encouraged by the commentary of our investee companies, which generally operate ‘in-region, for-region’ manufacturing strategies to minimize cross-border tariff exposures.

Despite the policy, macro and trade uncertainty, global investment in clean technologies remains on track to hit nearly $2.2tn in 2025 (according to the International Energy Agency (IEA)), 10% more than 2024 and almost twice the spend on coal, oil and gas. Investments in power grids, renewable energy and electrified transport lead the way, with China accounting for around a third of the total and EU (+12.4% annualised growth over 2019-24) and US (+9.2%) investments also delivering resilient growth. Notably, this surge is occurring despite the aforementioned policy, macro and trade uncertainties, demonstrating that electricity generated from renewable sources like onshore wind and solar remains cost-effective versus fossil fuels.

A key driver of the acceleration in clean technology investment, is the acceleration in global electricity demand. Having grown at 2.8% annually between 2000-23, global 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% in 2025, and remaining at this elevated level until 2027. Importantly, load growth demand is increasingly coming from developed economies, such are the power demands of data centres, particularly those supporting AI. The US, for example, is expected to see load growth of 2-3% in 2025, sharply higher than the 0.5% annually over the previous 20 years.

Developed economies will contribute to global electricity growth for the first time in two decades

Source: IEA 2025

One of the key drivers of developed market electricity demand growth is data centres, whose 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. According to Bloomberg New Energy Finance, there were total signed agreements of around 60GW in 2024, up nearly 40% year-on-year. The top four buyers (Amazon, Google, Meta, and Microsoft) accounted for 40% of total demand last year. Approximately 95% of these agreements in the US were for onshore wind and solar, with predictable operating costs making them well suited for long-term contracts, offering long-term price visibility to hyperscalers, 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.

We believe that renewables are being chosen to help satisfy this demand growth due to their speed to market, flexibility, and cost advantages over competitor technology. According to NextEra Energy, new US nuclear generation will take more than 10 years to deploy and will be the most expensive source of generation available. Meanwhile, natural gas power projects are experiencing significant cost inflation and extended build times with logistical constraints.

The Guinness Sustainable Energy Fund

The Guinness Sustainable Energy Fund delivered a return of +11.7% during the first half of the year, outperforming the MSCI World Index (+9.5%). Global equity markets suffered significant volatility, with the US underperforming Europe post the ‘Liberation Day’ tariff announcements and then recovering somewhat thereafter. Europe’s outperformance was fuelled by defence and infrastructure spending, supported by a weaker dollar.

Within our portfolio, the top contributing segments were our electrical installation and electrification sectors, while underperforming segments included our solar/wind equipment and auto-exposed electrification names. We are encouraged at the diversity and breadth of contribution within the portfolio, with our top 10 contributors equally split across US and Europe and representing all five of our master themes. Key discussion points were as follows:

• Our electrical equipment companies all performed well, driven by an acceleration in global electrification activity, grid spending and, in select cases (such as Legrand), exposure to the data centre sub-sector. Top contributor SPIE delivered upgraded guidance at its Capital Markets Day and benefitted from higher German infrastructure spending.
• Amphenol shares performed strongly, having materially beaten revenue and operating margins expectations in 1Q results. Amphenol’s IT interconnect solutions “IT Datacom” segment delivered +134% YoY growth (reflecting data centre and AI exposure) while four of its seven non-AI end markets posted mid teens or better growth.
• Deal activity remained strong within the space, with Johnson Matthey contributing well having accepted a bid for its Catalyst Technologies division for £1.8bn from Honeywell, at an implied attractive valuation of 15x Trailing Twelve Months Earnings Before Interest, Taxes, Depreciation, and Amortization (TTM EBITDA). Management plan to return ~£1.4bn (60% of current market cap) to shareholders once the deal is closed.
• Poorer contributors covered various themes and end markets. Enphase was directly affected by the cuts in subsidy to residential solar tax credits, Gentherm suffered from auto cycle weakness and uncertainties around Trump’s tariffs while Owens Corning suffered after highlighting weakness in the North America Residential market. Ameresco was weak after management noted some uncertainty around federal government projects in its $2.5 billion backlog of contracted projects.

1H 2025 contribution for Guinness Sustainable Energy Fund

Source: Bloomberg, Guinness Global Investors estimates; 30 June 2025

Outlook

Looking to the remainder of 2025 and beyond, we expect stabilisation in the transition after an erratic first half, giving way to more benign macro and market conditions, conducive to long term growth:

• Renewable power generation is expected to grow c.1,200 TWh in 2025 (+12%), as demand from AI and datacentres increases. This is against a backdrop of US electricity demand growth of 2-3%, following a decade ex-growth where electrification was offset by efficiency gains.
• Grid investment will increase to support the growth, growing at 15% in the US in 2025 (twice its historic rate of 7% per year) from a base of near $90bn in 2024 Growth reflects the delivery of federal upgrade funds through the Infrastructure Investment and Jobs Act (IIJA), underlying electricity demand growth and the growing need for battery storage.

Year on Year (%) Change in US Electrical Utilities Capex

Source: Bernstein, June 2025

• Building efficiency and electrification will see sharply greater investment, increasing from $340bn in 2022 to $600bn per year from 2026-30 (10% annual growth versus a historic rate of 5%) driven by energy security, economics and tightening building standards. The EU Clean Industrial Deal (Feb’25) added various new energy efficiency targets while US policy continues to support efficiency in the construction, industrial and power sectors.
• EV sales should be around 22 million in 2025, representing around 25% of total passenger vehicle sales. Technological innovation in the space remains strong, with the first EVs able to offer recharging times competitive with ICE refuelling now being made available. Whilst China remains the only scaled market where EVs are on average cheaper to buy than comparable ICE vehicles, we continue to expect the global EV/ICE parity benchmark of $100/kWh batter prices to be reached in 2027, supporting 50% global penetration by 2030.
• Solar remains the cheapest form of new electricity supply and we expect record low module prices in 2025 to spur growth in all major geographies with full-year global installations likely close to 695 GW in 2025, up nearly 15% on 2024. China will still represent around half of all installations with European and North America solar demand set to rise to 78 GW and 48 GW respectively, with a larger share being solar+storage deployments.
• The global wind industry is on track to deliver a record level of ~143 GW of installations in 2025, with China being less than half of the market. For wind equipment manufacturers the outlook for margins is attractive as the pricing of new order intake remains elevated while raw material costs have stabilised, potentially allowing gross margins to maintain recent higher levels in 2H 2025. US policy uncertainty has brought a lower level of new orders in the first half of the year.

The outlook we summarise here is broadly consistent with current government activity and observable investment plans. To be clear, however, the growth described falls well short of the energy transition activity needed to achieve a net zero / 1.5 degree scenario in 2050, as targeted by the Intergovernmental Panel on Climate Change and reiterated at COP28. In a net zero scenario, the deployment of renewable generation capacity, penetration of EVs and battery storage, use of alternative fuels and implementation of energy efficiency measures will need to accelerate markedly.

At 30 June 2025, the Guinness Sustainable Energy Fund traded on a 2025/26 P/E ratio of 18.4x/15.4x. On a 12-month forward view, the Fund trades at about a 15% P/E discount to the MSCI World Index, despite consensus forecast suggesting it will deliver superior earnings growth (13.8%pa vs the MSCI World at 9.7%pa).

Valuation and earnings growth of the Guinness Sustainable Energy Fund

Source: Guinness Global Investors (30 June 2025)

The 12-month forward P/E of the fund has de-rated against the MSCI World Index for around two years, falling from around a 40% premium to a 15% discount. This is back to the level seen in early 2020, pre the announcement of the European Green Deal, China’s decarbonisation plans and the inflection in electricity demand growth and grid upgrading requirements.

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

Source: Guinness Global Investors (30 June 2025)

We consider this valuation discount to be at odds with the superior earnings growth that consensus expects to be delivered by the fund. Since the end of 2018, consensus 12-month forward earnings expectations have consistently exceeded those of the MSCI World, with periods of relative strength often aligned with periods of fund outperformance. Between 2024 and 2027, consensus expects our portfolio to deliver compound annual earnings growth of 13.8%, which is nearly 1.5x the earnings growth rate of the MSCI World.

This valuation dislocation appears to be attracting long-term financial and strategic buyers looking to grow their exposure to a multi-decade growth theme for a discount, resulting in an uptick in M&A across our investment universe in the last two years. Bloomberg New Energy Finance notes that the number of climate-tech M&A deals with a value of over $1 billion dollars has increased from 13 in 2022 to 20 in 2024, with three in Q1’25 alone, a quarter which saw the largest number of deals in the last three years (79).

Catalysts for the rest of the year include the return of policy clarity in the United States as well as 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 2H’25 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 of around 30 broadly equally weighted positions, 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.

Key themes in the Guinness Sustainable Energy Fund

Source: Guinness Global Investors (30 June 2025)

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