Clean Energy Adoption: Consideration for Investors

The world faces one of its biggest challenges, transitioning to net-zero emissions by 2050. One of the fastest routes for achieving this goal is adopting clean energy technologies, which would, in turn, require huge investments. The International Energy Agency (IEA), in its recently published World Energy Investment report, estimates that globally, investment across the energy sector will reach a record USD 2.8 trillion in 2023, of which investment in clean energy (which includes renewable power, nuclear, grids, storage, low-emission fuels, efficiency improvements and end-use renewables and electrification) will be to the tune of USD 1.7 trillion. The report further states that in terms of the annual clean energy investment increase in recent years (2019 to 2023e), China tops the list, followed by the EU and the US.

Europe has laid out extensive plans to become the first climate-neutral continent by 2050, aiming to achieve this target by reducing greenhouse gas emissions by at least 55% by 2030. And with a 4% decrease in greenhouse gas emissions observed in Q4 2022 versus the same quarter of the previous year, it would appear the EU is on track to meet this timeline. On the other hand, during the same period, the EU’s GDP increased by 1.5%, signaling improved economic activity. While according to EMBER’s European Electricity Review 2023, for the first time in 2022, the share of wind and solar (22%) in the EU’s electricity generation was above fossil fuels (20%) and coal (16%).

Factors to consider when investing in Clean Energy ETFs

With governments and businesses globally focusing on accelerating the clean energy transition, clean Energy ETFs have become a popular investment vehicle by which investors can participate in alternative energy trends and support decarbonization efforts.

As with any other investment decision, however, an investment in clean energy should align with the investor's broader investment goals and risk appetite. Here we look at a few critical factors to be considered when making an allocation to ETFs investing in this trend:

Portfolio Holdings

Evaluate portfolio holdings carefully to see if the fund is well-diversified across different clean energy sectors and geographic regions. This will not only help in understanding if the strategy followed in the ETF is in sync with your goals but can also highlight potential concentration risks which could hamper performance of the ETF in the long term.

Expense Ratio

Examining the expense ratio of the ETF is an essential factor, as a lower expense ratio will enhance returns in the long run.

Assets and Fund Flows

It is important to look at the fund’s asset base and recent flow data as these trends can give a fair indication of the liquidity and investor interest in this category.

Performance Metrics

For ETFs that track a particular index, tracking difference is an essential indicator for gauging how well the ETF mirrors the benchmark's performance. In addition, evaluating the ETF's performance against category peers, across different time periods, can demonstrate how the fund has performed during various market cycles – although it’s important to remember that this is not an indicator of future performance.

ESG Score

For ESG-aligned investments, such as Clean Energy ETFs, a fund’s ESG score can be an important indicator to consider as part of the selection process. Based on a unique consensus-driven methodology, Trackinsight offers an in-depth insight into the ESG consensus on firms to which ETFs are exposed, as well as major controversies and sensitivities.

Access the Clean Energy Theme

For investors seeking to gain exposure to the Clean Energy theme, Trackinsight’s ETF Screener is a useful tool, helping to identify, review and compare funds based on many of the above criteria.  It currently identifies 29 Clean Energy ETFs, including the following four options:  

iShares Global Clean Energy UCITS ETF (INRG)

The largest clean energy ETF, iShares Global Clean Energy UCITS ETF (INRG) has an AUM of  USD  5.29 billion and tracks the S&P Global Clean Energy Index.INRG invests in clean energy companies from developed and emerging markets and has a TER of 0.65%.

Invesco WilderHill Clean Energy ETF (PBW)

Invesco WilderHill Clean Energy ETF (PBW) has an AUM of USD 681.46 million and tracks the WilderHill Clean Energy Index. The ETF is mainly composed of clean energy companies that are publicly traded in the United States. The ETF has a TER of 0.62%.

Fidelity Clean Energy UCITS ETF (XLON:FRNW)

The Fidelity Clean Energy UCITS ETF tracks the Fidelity Clean Energy ESG Tilted index providing physical exposure to 50 holdings. Based on the ESG consensus the fund’s portfolio has an A+ final sustainability grade with 95% of holdings scoring positively. The ETF has a TER of 0.50% and AUM currently stands at USD 4.41 million.

L&G Clean Energy UCITS ETF (XLON: RENW)

Tracking the Solactive Clean Energy Index, the L&G Clean Energy UCITS ETF provides physical exposure to a diversified basket of 52 holdings. The fund’s portfolio has a final sustainability grade of ‘A’ with 80% of holdings scoring positively. The current AUM stands at USD 219.99 million and the ETF has a TER of 0.49%.

References:

• https://iea.blob.core.windows.net/assets/8834d3af-af60-4df0-9643-72e2684f7221/WorldEnergyInvestment2023.pdf
• https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Quarterly_greenhouse_gas_emissions_in_the_EU#Emissions_by_economic_activity
• https://ember-climate.org/insights/research/european-electricity-review-2023/

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.