Interest in Clean Energy ETFs Is Soaring With Joe Biden In Office

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Within his first hours in office, President Biden signed executive orders rejoining the Paris Climate Agreement, canceling the Keystone pipeline, and reinstating more than 100 environmental regulations. And so began what many have predicted will be a new era of investment in clean energy in the fight against climate change. 

The flurry of activity certainly has investors’ attention. ESG ETFs—that is, funds with a focus on companies with good environmental, social, and governance practices—are surging in popularity.

Inflows into these funds are growing at an exponential rate. In 2018, the group took in roughly $5.5 billion. In 2019, that figure grew to $21.4 billion. Last year, it took just nine months for investors to pour more than $30 billion into ESG funds.

Survey Says?

And the surveys around ESG investing are just as enthusiastic as those flows would indicate. 

A 2019 survey from the Morgan Stanley Institute for Sustainable Investing found that 95% of millennials and 52% of the overall population have an interest in sustainable investing. The CFA Institute found that 85% of members now take ESG into consideration when making an investment decision. More recently, a survey from Institutional Investor Services found that the COVID-19 pandemic only seemed to increase the importance of ESG in the eyes of investors.

Surveys tell one story—prices tell another. And if we are to learn anything from the past few weeks it’s that investors are running, not walking, to one facet of ESG in particular—the ‘E’. This covers anything from energy use, climate change impact, greenhouse gas emissions, waste, pollution, and renewable energy. 

Clean Energy Funds Catch Fire

Environmentally friendly funds have surged as a result. The VanEck Vectors Low Carbon Energy ETF SMOG returned 118% in 2020, while the VanEck Vectors Green Bond ETF GRNB is yielding 1.55% compared to the Bloomberg Barclays U.S. Aggregate Bond Index yield of 1.16%, as of December 14, 2020.

“Clean energy has been a story for a long time, but now it's really taking hold,” said Brandon Rakszawski, senior ETF product manager at VanEck. “The federal election results here in the U.S. appear to have been a catalyst for further price appreciation of clean energy companies, but the segment has been benefiting from increasing investor expectations for some time now.”

Since the start of 2020, shares of four stocks held by the SMOG ETF, Plug Power PLUG (5.07% of SMOG as of Jan. 31), Nio Inc NIO (8.94%), Bloom Energy Corp BE (1.49%), and Tesla Inc TSLA (10.09%) have risen dramatically.

‘Know What You’re Owning’

One of the main criticisms of ESG has always been the lack of uniformity among the ESG fund universe. Because there is no standard definition, index providers are free to make their own interpretations on the ESG theme. 

Some indexes will choose to simply screen out bad actors, such as big oil companies, or will exclusively target companies that score well on their proprietary ESG scoring systems. Others choose to provide targeted exposure to a specific sub-sector of the ESG universe. 

SMOG is one such example of the latter. The fund tracks the Ardour Global Index Extra Liquid, which includes companies engaged in the production, use, or storage of alternative energy from sources like bio-fuels, wind, solar, and hydro. It also includes the various technologies that support the production, use, and storage of these sources. 

Discrepancies in the ESG universe make it especially important for investors to look under the hood of an ESG fund they’re buying, Rakszawski said. The strategy of an ESG fund will not only affect its mission, but could dramatically alter its long-term performance. 

“Every index provider and issuer, may have a different take,” he said. “Understanding if an ETF is concentrated in certain companies or clean energy sub-themes such as solar, wind, or electronic vehicles is important when aligning your investment with your desired outcome. It comes down to knowing what you own.” 

Important Disclosures: 

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