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Clean Energy VS ESG Funds

The focus on clean energy to preserve the environment and reduce the impact of carbon pollution has gained huge momentum in the last few years. Clean energy’s popularity doesn’t stop there.  Just as there are many cleantech companies around, there are almost as many green funds to invest in.

How different are clean energy funds from the newly established ESG funds?

Environmental, social, and governance, or ESG, funds invest in companies that show initiatives in one or more of the “E”, “S” or “G” factors defining their name. When investors encounter an ESG fund, it means they are able to find stocks that focus on the environment, social, or governance issues. 

Each company or stock in the fund doesn’t need to include all three ESG elements – it could easily focus on just one, but the fund can also have a mix of stocks in the three different areas.

Clean energy exchange-traded funds (ETFs), on the other hand, focus just on this environmental aspect of the ESG terminology.

While a big chunk of the “E” factor includes clean energy, such as air emissions and quality, clean water and sanitation, and solar, it can also include areas that pure-play clean energy funds wouldn’t necessarily cover. These could be the waste and disposal of materials a traditional company uses to make their products or the effect of a company’s operations on the environment.

Rene Reyna, head of thematic and special products strategy at Invesco, says that when their ESG funds were created in the early 2000s, the ESG terminology and ratings did not exist. “So, when we talk about our product line as it relates to ESG, we use the phrase ‘they are aligned with ESG’, especially the E, but ‘they weren’t designed as ESG’.”

Reyna refers to their funds as thematic with a specific focus on clean energy companies. Invesco has seven such funds.

“For investors who have an opinion and view on the environment or the climate, you can really give them an opportunity to invest with that intention and focus on those areas of the marketplace,” said Reyna.

He said their funds’ strategies fit with the United Nations Sustainable Development Goals, “which are the blueprint to address global challenges,” numbers 6 and 7. Those are clean water and sanitation, and affordable and clean energy, respectively.

One of the best clean energy funds last year was Invesco Solar ETF (TAN). This is a pure-play fund that tracks a solar index. Only companies that generate at least two-thirds of their revenue from solar are included in the index. There are 30 companies in the portfolio.

“In one ticker, you get access to the global solar value chain,” he said. About 30 percent are U.S. companies with the rest in other countries.

The fund saw tremendous investor demand last year, getting over $1.3 billion in inflows. Its return soared 233 percent in 2020 and it’s up 15.27 percent year to date.

A fund that has more diversified exposure to clean energy is Invesco WilderHill Clean Energy ETF (PBW). It holds solar, wind, energy storage/battery, and biofuel stocks. The index selects companies that derive at least 50 percent of their revenue from clean energy.

For those who’re looking for clean water management funds, Invesco Water Resources ETF (PHO) might fit the bill. The fund has a bias toward green companies as its index uses a third-party screen to select green stocks. As a result, the fund focuses mostly on water conservation and preservation as opposed to more traditional funds that could include utilities.

The fund was up 20.84 percent last year. Its global counterpart is Invesco Global Water ETF (PIO).

“We are in the early stages of what’s going to be a longer-term growth trend in clean energy,” said Reyna. “Some of the drivers that led to the performance in 2019 and 2020 still exist.”

He said the cost of these technologies has come down dramatically. 

“Cost to generate solar power has come down 82 percent in the last 10 years. The cost of the lithium-ion batteries has come down 88 percent over the last 10 years. So, those trends, combined with the innovation, should result in more growth,” he said. “You add the policy element of the three world’s largest blocks – China, U.S., and Europe – all collectively striving to decarbonize, and so we’re going to see capital spend increase in this area. Then you’re going to see additional commitment from the corporate side as well.”


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