Green Gains: Clean Energy ETFs Outperform Oil & Gas

Exchange-traded funds, or ETFs focused on clean energy are experiencing a resurgence, outperforming those centered on oil and gas exploration and production. This comes after a challenging two-year period for clean energy ETFs, which saw significant losses due to rising interest rates, supply chain issues, and a slowdown in clean energy installations.

Over the same period, cuts to crude oil output by major producer groups have helped lift earnings for oil and gas producers, which in turn boosted the returns of ETFs tied to that space by more than 50%.

However, over the past month an array of ETFs dedicated to key aspects of the energy transition – from renewable energy generation to smart grid management and uranium extraction – have all posted positive returns just as a major ETF tied to oil and gas output lost roughly 5%.

Several factors could derail this relative recovery in clean energy momentum, including a worsening Middle East conflict and higher-for-longer interest rates in the United States.

But if a peace deal is reached between Israel and the Palestinian militant group Hamas in Gaza and interest rates trend lower in key consumer markets, further pressure on oil and gas prices could materialize just as the affordability of renewable generation equipment improves.

That could potentially accelerate the recent divergence in ETF returns and support clean energy investing trends while undermining the appeal of fossil fuels.

ETFs PERFORMANCE HISTORY:

Over the past five years or so, investment vehicles tied to clean energy have endured a roller coaster ride.

Appetite for exposure to renewables soared from early 2020 through to the start of 2021 as several major economies adopted supportive policies designed to accelerate the energy transition away from fossil fuels and stimulate the development of industries and expertise in the clean energy arena.

Key clean energy vs fossil fuel ETF performance since Jan 1, 2020

5-year chart of clean energy ETFs vs key oil & gas production & exploration ETF

The iShares Global Clean Energy ETF (ICLN.O), opens a new tab characterized the broad flow of investor interest in clean power during that period, with prices rising by around 180% from January 2020 to January 2021.

Over that same period, investor interest in traditional energy developers dwindled amid a broad push-back against fossil fuels, exacerbated by the global downturn in fuel use during COVID-19 lockdowns.

The S&P oil & gas exploration and production ETF (XOP.P), opens new tab, one of the largest ETFs tracking fossil fuel output, slumped by over 60% through the opening four months of 2020, and finished out the year still nursing more than 40% losses despite recovering mobility and business activity in several economies.

COVID CRUNCH:

Following the upsurge in enthusiasm for clean energy in 2020, project developers during 2021 and 2022 experienced acute difficulties in securing sufficient quantities of related equipment – from solar panels and power inverters to racking systems and turbine blades – as supply chains remained impaired by COVID-19 movement restrictions in China and elsewhere.

These restrictions led to major project delays and component cost rises just as widespread interest rate increases curbed consumer purchasing and borrowing power, and resulted in a slowdown in renewable infrastructure build-out across several regions.

Russia’s invasion of Ukraine in early 2022 then caused disruption to natural gas and oil flows, which helped lift the prices of those commodities and boosted earnings for several key fossil fuel producers.

TREND REVERSAL:

The combination of cost climbs for renewable energy projects and higher fossil fuel prices resulted in a downturn in investor interest in renewable energy ETFs and a steady increase in the returns posted by fossil fuel ETFs since 2022.

Investment vehicles tied to uranium extraction snapped the downtrend in clean power investing since the second half of 2023, as growing policy support for nuclear generation sparked investor positioning in case of a shortage of nuclear fuels.

ETFs tied to electric grid upgrades and smart power management systems also made gains in 2023, as awareness about the challenges of incorporating renewable energy into existing grid systems sparked major utility-scale investments.

So far in 2024, the URA uranium ETF is up by around 14% while the returns posted by the S&P oil & gas exploration and production ETF and the Nasdaq Clean Edge Smart Grid (GRID.O), opens new tab are around 12%.

Other major clean energy ETFs, including the iShares Clean Energy ETF (ICLN.O), opens new tab, so far remain in the red on a year-to-date basis.

But if the momentum seen over the past month is sustained, all major clean power ETFs, including the First Trust Global Wind Energy ETF , may soon register positive returns for the year so far, which will serve to boost sentiment across the clean energy space.

And if that sentiment is further boosted by supportive macro-level changes regarding geopolitical tensions and interest rate regimes, additional investor momentum into the broader clean energy ETF space can be expected.

Disclaimer: Gavin Maguire wrote this opinion piece for Reuters. WriteCanvas modified the first paragraph and the headline.

I was delighted with the evolution of ESG in the past decade. The subject has garnered global attention and got the attention of regulators who are constantly upgrading the frameworks and introducing new compliances. On the one hand, I am happy that ESG is dominating decision-making at the board level, but on the other, I am also saddened that the enterprises are moving towards more camouflage or greenwashing. It is a double-edged sword.

I have been thinking about this issue as a result of recent news and feature stories in the newspapers on television and other platforms. Globally, the political landscape, protests, the potential to manipulate the numbers, and the practice of “greenwashing” are a few issues dominating the sustainability landscape. The impact of ESG variables is particularly noticeable in funding choices, mergers & acquisitions, and investment strategies.

The moot point is, do these principles apply to India? Since the majority of the occurrences I have noticed are global in nature, it is still too early to draw any conclusions. But trust me, we are not too far behind.

ESG due diligence

Take, for instance, the most recent KPMG report—a study on ESG Due Diligence. According to the research, more than half (53%) of investors have given up on M&A projects because of significant issues with regard to ESG due diligence. This study surveyed 200 US ESG practitioners, including corporate and financial investors and M&A debt providers.

However, this does not present the entire scenario. According to 42% of respondents, the results of the ESG due diligence led to lower purchasing prices. Over 60% investors stated that they would be willing to pay more if a company showed advanced ESG maturity and a commitment to their values. More than a third of them said that this premium might be higher than 5%.

It is interesting to note that KPMG, in earlier research for the EMEA region, observed a rise in ESG evaluation, with four out of five dealmakers stating that ESG concerns now occupy a significant position on their M&A agendas.

ESG gaining prominence

Another study conducted by media analytics company Cision reveals the prominence of ESG issues in traditional media and social platforms. Globally, even as ESG reportage in the media and discussion on the topic on social media increased between January 2020 and June 2023, consumers were unwilling to pay more for environmentally friendly products and were uninterested in corporate social responsibility.

The study was focused on Germany. ESG concerns saw a 36 percent upswing in visibility in the first half of 2023 in comparison to the previous three years. Ecological issues increased by 74% during this evaluation period, social issues by 8%, and corporate governance issues by 6%. (No clarity).

While, on the one hand, corporates are embracing transparency to meet increased ESG reporting standards, we also come across instances of greenwashing, and this number, too, is rising. I believe the organizations have been unable to articulate and communicate their ESG strategies and related outcomes.

As a veteran in the communications industry, here are my two bits.

Effective communication is the key: Have a communications strategy in place. Identify the key points and the focus areas you want to communicate. Elaborate your ESG initiatives in the form of case studies.
Manuela Schreckenbach, Head of Insights Consulting, DACH at Cision, also notes that efforts are being made to combat “greenwashing.” A Dutch court recently granted environmental organizations’ request to move on with legal action against KLM over alleged greenwashing in the airline’s “Fly responsibly” commercials.

Companies of all stripes are increasingly promoting their “GREEN” efforts. Some businesses have resorted to overstating, lying about, or inventing their ESG credentials rather than making genuine adjustments to their operations and goods. How many of these claims will withstand scrutiny from authorities, activist groups, or opportunistic customers remains to be seen.

As per a Reuters report, as part of a concerted effort by international regulators, the UK Advertising Standards Authority (ASA) has recently enforced action against corporate greenwashing. Airlines, banks, fashion retailers and energy giants are among over 20 companies targeted by the ASA for misleading statements and representations about their sustainability and environmental credentials.

Recalling here the UK’s Competition and Markets Authority investigation into retailers ASOS, Boohoo, and Asda’s fashion brand, George.

I leave you with a food for thought —— Sustainable practices should be a habit and not to be forced element. Do you agree?

Tag: Reuters