With July the hottest on record and wildfires burning out of control in Europe, one exchange-traded fund is taking environmental, social and governance (ESG) investing in a new direction.
The Procure Disaster Recovery Strategy ETF, which tracks a portfolio of companies engaged in recovering from disasters such as hurricanes, wildfires, floods or earthquakes, has enjoyed a strong start since launching in May last year.
It is up 17.11 per cent so far in 2023 and 28.85 per cent over the past 12 months. However, it is still a minnow, with a market cap of $5 million, and may prove volatile, too.
As investors have discovered lately, saving the planet is not a risk-free operation.
After three years of double-digit returns, the MSCI World ESG Leaders Index crashed 19.07 per cent in 2022, as war in Ukraine and the subsequent energy price shock sent investors scrambling back into oil and gas companies.
It is on the mend now, rising 16.07 per cent so far in 2023, as part of the wider stock market recovery.
Many companies involved in clean energy or climate change mitigation are small, growing companies and this increases the risks, says Dzmitry Lipski, head of funds research at Interactive Investor.
“Growth stocks have struggled lately as rising inflation has made investors reconsider how much their future earnings will be worth in real terms,” he says.
Rising interest rates also hit the sector by driving up borrowing costs and making capital harder to access.
However, investors face another risk, he says.
“ESG stocks also have low weightings to the energy and industrials sectors, which are good sectors for dividends. Investors must make sure their portfolios remain well-diversified without too much bias to any one style or company size,” Mr Lipski says.
Those who understand the risks could get cheap, easy exposure to the theme via the iShares Global Clean Energy ETF, he adds.
“This ETF is the best option to gain broad, diversified passive exposure to the clean energy theme, with a proven track record.”
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This remains a volatile sector and performance has been mixed. The ETF is down 12.5 per cent so far this year, although over five years, it has grown an impressive 110.31 per cent.
Mr Lipski also recommends the VT Gravis Clean Energy Income Fund, which invests in developed market wind, solar and hydroelectric companies.
“It aims to generate dividend income and protect capital, and top holdings include Greencoat UK Wind, Renewables Infrastructure Group and Clearway Energy,” Mr Lipski says.
The fund has also been volatile, falling by 15.58 per cent over one year but rising 59.92 per cent over five years.
Most people invest to build wealth for their retirement. Saving the world is a different goal but it may be possible to do both, says Laith Khalaf, head of investment analysis at fund platform AJ Bell.
“Climate change is a huge threat but also presents a tremendous opportunity across sectors, including renewable energy, sustainable agriculture, water management, green construction and low-emission transportation. These are exciting sectors but may also be volatile,” he says.
Further complicating matters is what qualifies as a socially responsible investment and is up for interpretation, says George Sweeney, investing expert at personal finance comparison site Finder.com.
Scepticism has grown as many ESG-labelled funds are traditional funds given a new badge, and not as clean as they pretend to be, he warns.
“By seeking out companies that are actively attempting to mitigate climate change, it might be possible to hit that sweet spot of both getting rich and saving the world,” he says.
Mr Sweeney picks out two “climate positive” investment trusts, mutual funds that are listed on the London Stock Exchange and traded in the same way as stocks: Jupiter Green Investment Trust, which invests in a global portfolio of small and medium-sized companies, and Greencoat UK Wind.
The Jupiter fund is up 4.38 per cent in 2023 but its five-year performance has been disappointing, with growth totalling only 7.89 per cent.
Greencoat is down 3.94 per cent this year but up 17 per cent over five years.
After a tough spell, interest in ESG is reviving and the sector should, by its nature, offer more sustainable returns, says Emma Deuchars, investment manager at fund platform Bestinvest.
“It’s important to have a long-term time horizon when investing in what are often small and medium-cap holdings,” she says.
She tips the Impax Environmental Markets investment trust, which invests across a range of environmental issues – including alternative energy, energy efficiency, water treatment, pollution control, sustainable food and agriculture.
Impax is down 3.7 per cent over one year but up 57.5 per cent over five years.
Those happy to take on a bit more risk could buy the shares of individual companies that are working to reduce their carbon footprint, says Laura Hoy, an ESG analyst at wealth advisory firm Hargreaves Lansdown, who tips French energy distribution and management company Schneider Electric.
“The group’s operations span several continents and it is aiming to boost revenue from efficiency, decarbonisation and promote longer use of existing assets,” she says.
London-listed pharmaceutical company AstraZeneca is looking to decarbonise its supply chain and cut the emissions of its products. “This offers another way to play climate change,” Ms Foy says.
Vijay Valecha, chief investment officer at Century Financial in Dubai, tips three ETFs involved in climate change mitigation.
His first choice is the Green X Green Building ETF, which focuses on companies involved in green infrastructure projects such as sustainable buildings and eco-friendly transport systems.
“It also targets the technologies used to increase energy efficiency in residential, commercial and public buildings. The fund is up 7.23 per cent so far this year, although down 11.21 per cent over five years.”
Next, Mr Valecha highlights Rize Circular Economy Enablers UCITS ETF, which invests in companies that aim to maximise resources and minimise waste.
“Holdings include Nike and Lego, alongside packaging companies trying to reduce plastic waste,” he says.
Launched this May, the fund has no track record yet, adding to the risk.
However, another fund focusing on this growing sector, Xtrackers MSCI Global SDG 12 Circular Economy UCITS ETF, was launched in 2014 and has climbed 7.9 per cent over one year and 56.6 per cent over five years.
His final pick is the Global X Hydrogen ETF, which invests in companies that stand to benefit from the fast-growing global hydrogen industry.
“This is a niche market, at least today, so a broad-based ETF is probably the safest way to invest,” Mr Valecha adds.
The fund is down 10.31 per cent in the year to date and has fallen 56.65 per cent over five years – and is far from a guaranteed winner at this point.
As the push against climate change intensifies, Mr Valecha warns against investing in “brown” equities rather than green, as industries that are heavily reliant on fossil fuels could end up on the wrong side of history.
Yet, it would take a brave investor to make the green shift all in one go. As we saw last year, fossil fuel stocks aren’t burnt out yet.