The US, Brazil and China unveiled plans this week to halt the rise of greenhouse gas emissions and increase the amount of energy they generate from renewables. This welcomed effort to stem global warming and climate change could also offer an attractive opportunity for clean energy ETFs.
The US, China and Brazil have pledged to reduce emissions and increase renewable energy supply.
In a joint statement, US President Obama and Brazilian President Dilma Rousseff, leaders of the two largest producers of greenhouse gas emissions in the Americas, pledged that their countries will generate 20% of their energy from renewables by 2030, a plan that would require Brazil to double its current renewables output, and the US to triple.
As the world’s largest greenhouse gas producer, China’s plans stand to have the most significant effect on carbon dioxide levels in the atmosphere. Their announcement this week to reduce emissions to 60-65% of current levels by 2030 will require investment across low carbon energy, industrial efficiency and improving transport and urban systems.
As the UN Climate Summit in December approaches, many countries will be announcing their carbon emission reduction plans; however, there are few that can rival the impact of the US, China and Brazil. In order to meet these challenges all three countries will need to make significant investments in clean energy, an effort which presents a tremendous sales opportunity for renewable energy-related companies. Demand will not only be focused on clean energy but also on companies producing clean technologies which increase energy efficiency in areas such as buildings and transport.
Positive developments such as these have seen clean energy ETFs perform strongly year-to-date. The slight recovery in the oil price has of course helped as the attractiveness of renewable energy increases as the cost of fossil fuels rise. Investors who believe in the long-term attractiveness of the themes of clean energy and a low carbon future have a number of ETFs available to them, including funds from iShares, PowerShares and Amundi, amongst others.
The iShares Global Clean Energy UCITS ETF (INRG LN) tracks the performance of the S&P Global Clean Energy Index and offers exposure to the 30 largest and most liquid listed companies globally that are involved in clean energy related businesses. As the top three country exposures are China, the US, and Brazil (as at June 2015), the fund is well positioned to benefit from the strategic push for clean energy in these countries.
The PowerShares Global Clean Energy UCITS ETF (PSBW LN) is based on the WilderHill New Energy Global Innovation Index and invests in companies that focus on greener and generally renewable sources of energy and technologies facilitating cleaner energy. With over 100 holdings (as at June 2015) the PowerShares fund is a less concentrated offering than the iShares product.
It is important to be aware of the sector and regional differences of these funds versus broad based equity indices. Compared to the MSCI ACWI Index, both funds are overweight the industrials, IT and utilities sectors, underweight the US, and overweight China. As such, the funds’ performance will tend to exhibit a higher degree of volatility compared to indices such as the MSCI ACWI Index.
Investors looking for broad equity market exposure which favours low carbon companies should look at the Amundi MSCI World Low Carbon UCITS ETF (LWCR FP and LWCU FP). This fund tracks the MSCI World Low Carbon Leaders Index, which in turn is based on the MSCI World Index. The index excludes companies with the highest carbon emissions intensity and the largest owners of carbon reserves per dollar of market capitalisation, aiming to achieve at least 50% reduction in its carbon footprint. The fund’s tracking error to the MSCI World Index is kept under control by maintaining similar regional and sector exposures.