Green Investors Handily Beat the S&P 500 Over the Past Decade, Can They Do it Again?

Long derided as a poor way to make money, sustainable investing broadly outperformed the broader indices over the past decade and through the pandemic.  The traditional logic had been that divesting from the companies driving climate change like oil companies, airlines, automakers, and coal power plants comes at a cost.  However, the past ten years was a lost decade for shares of US energy companies overall and particularly during the early part of the pandemic witnessing oil prices briefly going negative.  The airlines, automakers, and utilities were also laggards compared to their green counterparts.  In fact, the S&P Sustainability Screened Index 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 reality is sustainable corporate governance has been quite good for investors’ during the Covid-19 pandemic and throughout the post financial crisis recovery.  There have been some notable winners in those companies driving the green revolution with disruptive technology.  Tesla and Enphase Energy have been two notable winners that have dominated their respective fields with technology that is resulting in green industries making some serious green for their investors.  Since 2013 Enphase shareholders have experienced a 50x return while Tesla investors have enjoyed a 100x return making their CEO the wealthiest man on Earth.

Strategy Shares CIO David Miller believes that we are still in the early innings of the transition to a sustainable NetZero economy.  The firm is betting firmly on the future of the green economy with the launch of the Strategy Shares Halt Climate Change ETF NZRO.  This confidence comes from the tremendous planned investment in low carbon energy, efficiency, and carbon removal forecast by the International Energy Agency to reach $4 trillion dollars per year by 2026. In fact, the scale of this opportunity for investment in sustainable infrastructure far exceeds the tremendous growth of the technology industry over the past twenty years in relative magnitude. 

While many “green” funds already exist Mr Miller makes the case that it is important to take a more disciplined approach to sustainability.  For example, the FlexShares ESG Select ETF (ESGG) owns holdings in Chevron amongst many others.  This begs the question that if some of these ESG ETFs invest in oil companies, what is the real value to adopting a sustainability mandate if it includes fossil fuel. 

Strategy Shares is working to up the ante amongst their peers by investing their own money in CO2 removal services from a Swiss company called ClimeWorks.  In September, ClimeWorks launched the world’s largest direct air capture “carbon sucking” plant that utilizes geothermal energy from the volcanoes in Iceland to power giant fans that suck air out of the atmosphere, separate the CO2, and convert the carbon dioxide into a carbonate before burying it permanently beneath the rock layer.  If we could build 40,000 of these direct air capture factories the numbers suggest we could get to NetZero carbon emissions.

In order to identify the potential winners in the transition to a sustainable economy the managers of the NZRO ETF begin their investment process by seeking out those companies that meet at least one of a set of climate-focused criteria:

• Direct commitment to net zero or reduced carbon emissions through a company climate pledge or involvement in such initiatives as the Paris Agreement or The Climate Pledge;
• Companies in the energy transition space deriving at least 50% of their respective revenues from activities in electrification, clean transportation, industrial and building efficiency, and other opportunities related to changing the ways in which energy is produced and consumed globally;
• Companies deriving at least 50% of their revenues from activities focused on advancing the progress of reducing carbon emissions through alternative energy innovation, technological advancements, climate-conscious value chains and other similar initiatives.

After all of the news about the inevitability of climate change due to continued greenhouse gas emissions it is nice to see that there is an alternative potential sustainable future.  There is good reason to think that investing a NetZero economy could be both lucrative and the right thing to do.