The invasion of Ukraine has come as a painful reminder of how much Europe depends on Russia for its energy consumption, and reducing that dependence has just become one of the region’s most pressing objectives. That’s put clean energy – from renewable sources like the wind or the sun – back on investors’ maps. So with the sector’s stocks trading 40% below their previous highs, is now the time to load up on the megatrend?

How did we get here?

Governments and corporations alike have been stepping up their efforts to speed up the transition to clean energy in the past few years. In the US alone, approved government spending on the sector has hit $480 billion, of which $45 billion will be allocated to renewables. China, Europe, and India have passed even more ambitious plans, emerging as the leaders for the next stage of the transition. In fact, most countries have set themselves specific emissions targets, and companies are increasingly committed to reaching net-zero emissions goals too.

That’s especially true now that war has broken out in Ukraine, with Germany moving forward with its plan to get all of its electricity from renewable sources by 2035. Many other countries are expected to follow suit. After all, the whole game has changed: transitioning to clean energy isn’t just about decarbonization anymore; it’s a matter of national security.

What does this mean for clean energy stocks?

Clean energy stocks rallied like a bull on steroids after Biden was elected president in 2020, and they rose 140% in 2020 on the back of a big support plan.

Since then, though, they’ve been struggling to sustain their momentum, with the clean energy sector trading 40% below its previous highs. That’s down to the combination of things: weakening fundamentals (the rise in production and shipping costs have reduced renewable companies’ profitability), the political backdrop (pro-green states like California are thinking about reducing renewable energy subsidies), the macroeconomic environment (interest rates are on the rise), and technical factors (valuations have reached extreme levels).

It’s difficult to know how close we are to the floor, but it might not be long before investors get wise to the opportunity. The outlook for renewable stocks has, after all, improved significantly in the last few months: short-term speculators have been washed out of their positions, sentiment is a lot more balanced, valuations are a lot more reasonable, and structural growth and profit outlook are as strong as ever.

These geopolitical tensions have already pushed clean energy stocks upwards. But I’d argue that this may ultimately provide the catalyst that refocuses investor attention on the sector and pushes it towards its next stage of growth.

What are the risks to that growth?

The first risk comes from the threat of higher interest rates. Like many growth stocks, clean energy companies’ cash flows are expected to peak much further in the future than other stocks. Put simply, that means higher interest rates will make those future cash flows worth a lot less today.

Second, while clean energy companies’ valuations have come down from a record 43x price-to-earnings (P/E) ratio in 2020, they aren’t exactly dirt cheap at 26x. And like all growth stocks, they’re at risk of a sudden change in investor sentiment, meaning they’re unlikely to prove a defensive investment if markets drop significantly.

Third, there’s the risk that the world’s ambitious climate goals will never be met. Governments do, after all, have a tendency to overpromise and under-deliver. A tense political climate and fragmented political landscape might also push politicians to favor popular measures over effective ones – and a record price at the gas pump is only going to exacerbate those pressures.

So what’s the opportunity here?

Let’s face it, the transition to clean energy is likely to be a bumpy ride. But if you have a long-term horizon, buying when there’s a short-term disruption like this one might be a great way to reduce your entry price.

The iShares Global Clean Energy ETF (ticker: ICLN, expense ratio: 0.42%) is a pretty solid choice if you want a cheap, passive, diversified and liquid way of investing in the theme. ICLN currently holds 96 companies and is well-diversified, investing across electric utilities (25%), semiconductor equipment (18%), renewable electricity (15%), heavy electrical equipment (14%) and multi utilities (9%) sub-sectors.

It’s also well-diversified in terms of energy sources and technologies, holding everything from offshore wind farm developers to hydrogen solution providers. Geographically speaking too: the US represents only 40% of its total exposure. ICLN also scores in the top decile in terms of environmental, social, and governance score. There’s one red flag: it has quite a high turnover, which could add quite a bit to the transaction costs.

But here’s what I think is most interesting about ICLN : it takes a core-satellite approach. In other words, its 10 largest holdings are relatively “stable” companies, but it also holds small stakes in extremely exciting (but risky) companies focusing on the newest technologies. And if just one of those turns out to be a 100-bagger, those small stakes could end up adding significantly to its bottom line.