Network Effects That Enable Sustainable ETFs To Drive Powerful Returns For Investors

There is a scientific formula known as “Metcalfe’s Law” that has been the driving force behind the fortunes investors have made in sustainability-focused stocks like Tesla and Enphase Energy.  Metcalfe’s Law quantifies the network effect and proposes that the value of a network is proportional to the square of the number of users.  As more customers join forces participating in a network effect company it becomes exponentially more valuable, growing like a snowball rolling down a hill.  The principle of the network effect is especially obvious when it comes to products that are expensive to produce on a one-off basis but benefit from economies of scale as more people join to connect.

The portfolio manager of the Strategy Shares Halt Climate Change ETF NZRO makes the case that the ultimate network effect industry is those companies solving for climate change. Ten years ago the cost of a kilowatt-hour of solar power to a homeowner was $.378. The economies of scale driven by the mass adoption of solar panels and more efficient solar inverters into a network of sustainable homes have brought down the cost below $.068 kWh today.

The reason this 82% drop in the cost of solar power is so important to the inverter industry is that it has crossed the adoption tipping point for homeowners. Back in 2010 the only people using solar power were doing it purely out of virtue for the climate due to the high cost. Today it is cheaper for homeowners in most states to use solar power from a home installation than it is for them to buy their electricity off the grid. This cost savings has created a tidal wave of demand that has propelled the earnings of these solar inverter companies exponentially upward. Better yet for the companies that NZRO invests in within the solar industry the cost per kWh continues to fall further creating ever more demand as more homeowners transition to sustainable energy. This flywheel of falling costs for homeowners propelling further gains for sustainability-focused businesses continues to accelerate.

The results speak for themselves as the S&P Sustainability Screened portfolio beat the S&P 500 Total Return Index on a 10 year basis by a measure of 17.98% vs 16.55% as of the end of 2021. The managers of the NZRO ETF recognize that sustainability-focused stocks have outperformed companies contributing to climate change like oil & gas exploration, airlines, and coal power plants. The economic reality is that those businesses in the fossil fuel industry are in a state of secular decline.

While old-line carbon-based industries are on their way out, the global planned investment in low carbon energy, efficiency, and carbon removal forecast at the IEA to reach $4 trillion dollars per year by 2026. It is hard to envision how a multi-trillion-dollar investment in this sustainability by governments, corporates, and consumers won’t flow through in a very significant way to the net income of the stocks that the NZRO ETF holds.