"There is an ESG premium applied to these assets. People want to hold them and they fit well into sustainable products and sustainable investment strategies," Merriam adds.
"For that reason they tend to trade relative to the cash flows they are producing at a more expensive level than other similar assets in the market. Investors need to be careful when buying these assets and make sure they are aware of the price they are paying.
"That said there are opportunities and one of them is looking at companies in the midst of their transition."
These are companies that are not necessarily pure play renewables producers or generators at this stage, but are on their way there, so as their reliance on carbon-emitting assets reduce, their valuations should increase.
Anna Haugaard, fund analyst at wealth manager Brewin Dolphin, says the investment opportunity does not just lie in energy generation but also in smart grids and networks, equipment, batteries and storage, charging points and hydrogen and carbon capture.
“UK and European integrated oil and gas companies are investing heavily in wind and solar projects and are putting capital expenditure into charging points as well,” she adds.
“Moreover, they are well positioned because of their existing infrastructure, such as pipelines and storage, to be leaders in hydrogen and carbon capture and storage.”
Renewable energy has an infinite supply. It is not like oil and gas, where there are finite reserves.
They can generate an income, but this may vary depending on the price paid for electricity and also any incentives received by the renewable energy installation companies.
While the transition to renewable energy reduces the dependency on fossil fuels, it does not come without considerable investment and a potential increase in the cost of energy in the short term.
Baynes says with the advent of new technology, there will inevitably be opportunities for investors to take advantage of. However, it will not be a "happy" transition for all as some companies get left behind and fail to make the transition.
“This is perhaps most prevalent within the car and oil and gas industries, which will inevitably see the largest challenges going forward. Innovation and new technology will likely see the emergence of some new big names and some existing big names getting bigger, however, the trouble with all of these 'mega-trends' is identifying the long-term winners, of which there will be few, and sifting out the losers, of which there will be many,” Baynes adds.
