Europe remains the leader in terms of the fight to reduce its carbon output, but America and China are also making increasing commitments to head in a similar direction. With the new President Biden taking office, plans to target climate-emission reduction in the US will increase. Mr Biden has also pledged to bring the US back into the Paris Climate Change Treaty framework – and to be a new figurehead of the clean energy transition after a number of years of leadership by the European Union.
The Biden climate plan is the most progressive climate strategy that the US has ever attempted. His election means the US will join China, the EU, Japan and South Korea in setting targets for ‘net zero’ greenhouse gas emissions by the middle of the century. According to the Climate Action Tracker – which monitors the world’s carbon-cutting plans – two-thirds of the world’s economy, which emit more than 50% of total greenhouse gases, now have net-zero commitments.
This shift in US climate-change policy had been anticipated – and many investors raced to include sustainable products in their portfolios. Two themes that benefited particularly well from this trend last year were clean energy ETFs, with the expected increased take-up of electric vehicles, and those investing in the battery technology itself.
The iShares Global Clean Energy UCITS ETF has a portfolio of 30 companies that produce clean energy through solar technology, biofuels, ethanol, geothermal, hydroelectric or wind – as well as companies that develop technology and equipment used in those fields. It has a global reach with 36% of the ETF allocated to US equities, 10% each to China and New Zealand – with most of the remainder invested in European companies. The ETF has taken a long time to reach positive performance. Since its launch in 2007, it is up just 23%, so a long-term investor who entered this product at launch will only now be seeing a positive return.
Another ETF product in this theme that has benefitted well in both performance and new money flows is the L&G Battery Value-Chain UCITS ETF. The ETF tracks 31 companies which provide ‘electrochemical energy storage technology’ (ie batteries) and mining companies that produce metals that are primarily used in their manufacture. The ETF returned 74% in 2020. It also has a global reach.
The global market for large and advanced batteries is expected to see good growth. It reached $64.1bn in 2019 and is expected to expand to $109.9bn by 2024. Lithium demand from the electric vehicle (EV) sector is expected to grow at a compounded average growth rate of 19.6% – a ten times increase in use in 10 years. As you might expect, the ETF has almost a quarter of its holdings from the Auto Manufacturers sector.
With a combination of increasing interest in alternative energy resources, oil prices on the rise once more, and more US states adopting clean-energy benchmarks – investments in clean-energy companies could see significant growth in the long term. It is worth noting that, although the clean-energy sector may have a bright future, the industry is still relatively new compared to traditional energy production. The direction of these themes needs to be closely monitored as they develop.
The two products mentioned above are also very sector-specific – and hold a small number of companies. This means their daily performance can be quite volatile. Its is not unusual to see the Clean Energy ETFs fall or rise by more than 5% in any one day. Although these new trends are underpinned by government policy, the risk of a change in direction is high, so investors in these themes should be cautious..
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