ETFs are the best way to capture clean energy sector gains

Jonathan Porter

Aug 17, 2021 – 5.00am

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Already a subscriber?

Annual growth of up to 76 per cent, the thrill of saving the planet and a sense of satisfaction in working towards a larger purpose are worthy reasons to look at clean energy ETFs.

“There is no doubt that ESG investing is growing in popularity among investors who are looking to align their money with their morals,” Finder investments specialist Kylie Purcell says.

Battery technologies are making a huge difference in the clean energy sector. Bloomberg

“Factors like an increase in Gen Z investors, a greater focus on sustainability from businesses and the current discourse around climate change are all contributing to the popularity of ESG ETFs,” she says.

“From a financial perspective, this is an industry with huge growth potential. The finite nature of fossil fuels means that the energy industry is looking for alternatives, which is creating value in the clean energy space.”

And the world’s love affair with lithium is causing the element to lead the charge, Purcell says.

“The movement towards a greater need for energy storage has prompted a growing enthusiasm for ETFs with exposure to battery technology and lithium,” she says.

There is a growing enthusiasm for ETFs with exposure to battery technology and lithium, says Kylie Purcell of Finder.

“As we look for more sustainable ways to generate and store energy, resources like lithium and advancing battery technology will be instrumental in reducing emissions for years to come.”

The influence of Elon Musk and the rise of Tesla has also had a significant impact on investor bullishness towards stocks in the electric vehicle and battery space, Purcell says.

“The ETF Security’s Battery Tech & Lithium ETF (ACDC) is one of the top-performing listed funds on the Australian Securities Exchange this year, having returned over 76 per cent so far in the last 12 months to July 30.”

Purcell cites eInvest’s Better Future Fund (IMPQ), which was named Green ETF of the Year by the Finder Green Awards this year, in recognition of businesses leading the way in sustainability.

“In addition to impressive financial returns, IMPQ goes beyond screening out negative impacts and proactively looks for companies that are generating more than 50 per cent of their revenue from operations that actively contribute to creating a sustainable future, like renewable energy,” she says.

“The BetaShares Global Sustainability Leaders ETF is another standout and is among the top five best-performing ETFs in Australia over three years, averaging 25 per cent.”

But, she cautions, the future of the sector is still uncertain.

“Whether wind, solar or battery, nobody knows for certain which energy source will be the most important decades from now. This makes energy sector stocks and ETFs among the more volatile. Do your research and don’t throw your eggs in the one basket.”

“The renewable energy market is still relatively new in Australia. Many clean energy companies are small or have only been operating for a short time. This can make them a riskier investment than more well-established blue chips.”

But the rewards are ample for those prepared to take the risk.

“The obvious reward is the positive environmental implications of these investments but we’re also seeing pleasing financial outcomes.”

The Australian arm of US securities giant VanEck launched one of its fastest-growing ETFs in March — with over $50 million in assets already under management.

Going beyond just excluding the ESG offenders is something investors should consider, says Arian Neiron of VanEck.

The VanEck Global Clean Energy ETF (ASX code: CLNE) is designed to meet the growing demand for renewable energy.

“Once the domain of higher-fee active managers, index innovation has made this possible for cost-effective index tracking funds such as ETFs,” Arian Neiron, VanEck’s Asia Pacific CEO and managing director, says.

“Our international and Australian ESG ETFs track MSCI indices, which go beyond the normal social responsibility exclusions,” Neiron says.

“Our ETFs include only the ESG leaders in their sector relative to peers. Going beyond just exclusion is something investors should consider, otherwise we would argue it is just ‘greenwashing’.”

Neiron says among the greatest concerns for investors are fossil fuels and carbon emissions.

“This trend has been growing for a number of years and we’re now passing the tipping point, with almost every major economy in the world committing to the Paris Agreement and demonstrating that with significant investments in clean energy and clean energy infrastructure,” he says.

“We have recently seen the launch of several climate change-related managed funds and exchange-traded funds (ETFs) into the market on the back of investor demand. But investors should still be on guard.

“By now, everyone has heard of ‘greenwashing’ and it is common in investment circles. Some product providers are launching products that claim to help the environment and combat climate change when they really don’t do a very good job of that.”

To check any ESG fund’s carbon intensity score, or ESG commitment, Neiron urges investors to look for this information on the issuer’s website or in the fund fact sheet.

“If the carbon intensity data or ESG metrics are not provided, then you need to ask why. Likely you will find the answer at msci.com/esg-fund-ratings, which makes all funds’ carbon emissions data and ESG profile available to the public.

“Just type in the fund name and MSCI ESG Research produces the fund’s carbon intensity score, its ‘green’ versus ‘brown’ revenue score, and its overall ESG profile.”

He says VanEck views clean energy as a long-term structural investment opportunity.

“As net electricity generation moves towards renewables there is both a positive social-environment outcome and potential long-term return outcomes,” he says.