In life, just as in investing, very little is certain. Unfortunately, crystal balls, fortune tellers and even economists more often than not get it wrong (please don’t hurt me, economists). So it’s fair to say any prediction of the future is often worth zero, zip, zilch or nada.
That said, accelerating global investment in decarbonisation is something that I’d be willing to hang my hat on.
After all, the OECD estimates that US$6.9 trillion a year is required up to 2030 to meet climate objectives. Meanwhile, the IEA believes that if we are to reach net-zero emissions by 2050, global clean energy investment will need to more than triple by 2030 to around US$4 trillion per annum.
Now, picking the winners of a multi-trillion dollar megatrend that is set to span the coming decades is hardly an easy task. That’s why exchange-traded funds, or ETFs, are a great option for investors looking to both add capital firepower to the transition, as well as benefit from this long-term investment opportunity, without the risk that comes with investing in a single stock.
So Livewire reached out to five ETF providers for their favourite funds for exposure to decarbonisation. In this wire, you’ll learn about three passive ETFs and two newly listed active ETFs from BetaShares, ETF Securities, Janus Henderson, Munro Partners and VanEck – as well as why these managers believe the race to net zero is such a compelling opportunity.
Tracking index: Solactive Climate Change and Environmental Opportunities Index
What it does: Invests in up to 100 leading global companies that derive at least 50% of their revenues from products and services that help to address climate change and other environmental problems through the reduction or avoidance of CO2 emissions.
Top 10 holdings:
BetaShares executive director, co-head of distribution and head of capital markets, Peter Harper, has pointed to the BetaShares Climate Change Innovation ETF (ASX: ERTH) as a great way for investors to participate in the decarbonisation of the global economy.
“This ETF provides investors exposure to a portfolio of global companies leading the fight against climate change,” he said.
“This true-to-label investment solution not only allows investors to add capital firepower to efforts to address climate change, but it also offers significant return potential.”
“Significant return potential” sure sounds nice, but what’s got Harper so convinced?
Well, he said the world needs to invest three to six times what is currently spending on mitigating climate change if we have any hope of meeting the Paris Agreement’s 1.5°C target.
“What sets ERTH apart is the fact that the Fund invests in companies beyond clean energy providers and includes innovative companies that are addressing other challenges associated with efforts to address climate change,” Harper said.
“As a result, the Fund includes companies involved in green transport, waste management, sustainable product development, and improved energy efficiency and storage.”
This includes top holdings such as electric vehicle manufacturer Tesla, intelligent power management company Eaton Corporation, and wind turbine producer Vestas Wind Systems.
“Not only are these companies helping improve environmental outcomes, they are also on the leading edge of exciting technological breakthroughs in their respective industries,” Harper added.
ETFS Battery Tech and Lithium ETF
Management fee: 0.69% p.a.
Net assets: $506 million
Inception date: 30 August 2018
Tracking index: Solactive Battery Value-Chain Index
What it does: Invests in 32 companies that are ether providers of electrochemical storage technology or mining companies that produce metals that are primarily used for the manufacturing of battery-grade lithium batteries.
Top 10 holdings:
ETF Securities head of distribution, Kanish Chugh, has selected the ETF provider’s Battery Tech & Lithium ETF (ASX: ACDC) as his pick to play the decarbonisation megatrend.
“The index targets pure-play companies, meaning companies that make batteries or mine lithium as their primary business,” he explained.
“Battery makers are identified using data from consultancy firm Clean Horizon. While lithium miners are identified with data from Fastmarkets’ Metal Bulletin.”
ACDC is currently the only ETF in Australia that invests exclusively in battery makers and lithium miners, Chugh added. And while other funds may broadly commit to “clean energy” or “vaguely-defined climate opportunities,” ACDC has a clear and singular focus, making it one of a kind.
“Battery technology is crucial for decarbonisation. This is because batteries are needed to store clean energy produced by solar, wind and hydro,” he said.
“Battery makers are surging around the world thanks to the rise of electric cars. Most famous carmakers have committed to going fully electric within the next 10 years.”
So why lithium? Well, Chugh said it’s by far the cheapest and most efficient battery material.
“Lithium batteries are easier to recharge, last longer and are lighter weight than all the alternatives at present,” he added.
“And while there may come a day when alternative battery technology replaces lithium ion, as the Nobel prize winning chemist Stanley Wittingham says: ‘It will be lithium for the next 10 to 20 years.'”
Janus Henderson Net Zero Transition Resources Active ETF (Managed Fund)
Management fee: 0.85% p.a.
Net assets: $450,000
Inception date: 30 March 2022
Tracking index: None, active ETF
What it does: Invests in a portfolio of global equities comprised of resources companies across the supply chain positioned for the transition to a low-carbon future.
Top 10 holdings:
Tim Gerrard, portfolio manager at Janus Henderson Investors, points to the firm’s Net Zero Transition Resources Active ETF (ASX: JZRO) as a great way for investors to get exposure to a concentrated portfolio of companies selected for their contributions to the transition to net-zero (as well as their potential to generate long-term returns).
As one of the two active ETFs presented in this list, Gerrard said the team boasts a collective 120 years in markets, blending both natural resource investment specialisation with stock market expertise.
“We view the transition to net-zero as a once-in-a-lifetime investment cycle across a wide range of sectors – particularly companies in the energy, mining and agricultural sectors,” he said.
“Natural resources are the essential building blocks of daily life, and as the world transitions to a low carbon economy, we believe natural resources companies will have a key role to play.”
And with the demand for electric vehicles, renewable energy solutions and battery storage set to accelerate between now and 2050, Gerrard believes the demand for raw materials used to build these technologies will experience similar growth.
“Meanwhile, exciting new and emerging industries, such as carbon capture and storage (CCUS) and green hydrogen have potential for strong growth profiles, particularly as government policy clamps down on industrial emissions and as the price of carbon increases,” he said.
“Additionally, we anticipate that the creation of a viable circular economy, where waste is recycled into materials to produce new products, will also make a significant contribution to carbon avoidance.”
In fact, the International Energy Agency estimates that the number of electric vehicles has now exceeded 10 million globally. By 2050, this is expected to reach more than 650 million vehicles.
“Each one of these vehicles will need a wide range of commodities for its batteries, motors and car bodies, not to mention the infrastructure to charge it,” Gerrard said.
“While a 65-fold increase is staggering, this is symbolic of some of the growth we are expecting to witness over the coming decades across a wide range of industries.”
Munro Climate Change Leaders ETF
Management fee: 0.90% p.a.
Net assets: $37 million
Inception date: 20 January 2022
Tracking index: None, active ETF
What it does: Invests in 15-25 global growth “climate winners” that help enable the decarbonisation of the planet.
Top 10 holdings:
While each of Munro’s funds are focused on finding global structural growth winners, chief investment officer Nick Griffin said the Munro Climate Change Leaders Fund (ASX: MCCL) differs in that it is focused on those growth companies that are best positioned to champion and win from the shift to net zero.
“In comparison to many other climate funds that focus on index weighted net-zero businesses, the Munro Climate Change Leaders Fund is built on a concentrated long-only portfolio of 15 to 25 companies combatting climate change,” he explained.
“The strategy specifically targets listed companies across a range of industries and countries whose earnings prospects should improve with the increased investment and focus on decarbonization.”
Munro has identified four sub-trends of interest related to the shift to decarbonisation:
Clean Energy: Companies at the forefront of renewable energy generation covering wind, solar and renewable diesel.
Clean Transport: Companies benefiting from the growth of electric vehicles, battery technology and alternative transportation.
Energy Efficiency: Companies at the forefront of insulation products, electrical switches, lighting and metering technology.
Circular Economy: Companies most likely to benefit from efforts to improve recycling, alternative packaging materials and management of wastewater.
However, Griffin notes these sub-trends may change over time based on both qualitative and quantitative assessment.
“Munro’s investment process – honed over 15 years – is based on the ability to identify sustainable growth trends that are underappreciated and mispriced by the market, and the resulting winning stocks,” he said.
“Climate investment is at the very start of its s-curve, with many new climate technologies still early in the adoption phase and therefore having the potential for significant growth.”
VanEck Global Clean Energy ETF
Management fee: 0.65% p.a.
Net assets: $115 million
Inception date: 8 March 2021
Tracking index: S&P Global Clean Energy Select Index
What it does: Invests in a portfolio of 30 of the largest and most liquid companies involved in clean energy production and associated technologies globally (in both developed and emerging markets).
Top 10 holdings:
VanEck Asia Pacific CEO and managing director, Arian Neiron, has named the ETF provider’s VanEck Global Clean Energy ETF (ASX: CLNE) as his pick of the bunch, as the world moves to rapidly decarbonise and soften the impacts of climate change.
Neiron believes this shift should result in two fundamental questions for investors:
How can I make the biggest impact to help halt climate change?
What approach is most likely to deliver the best investment outcomes?
“The answer to both is supporting and investing in the transition to clean, renewable energy,” Neiron said.
As it stands today, the burning of fossil fuels for energy produces the lion’s share of carbon emissions by a long shot (see image above), he adds.
“This is why most, if not all government climate policies around the world are focused on energy as the primary vehicle for decarbonisation; while funding and investments are being directed to clean energy producers, technology and equipment that enables us to transition away from burning fossil fuels,” Neiron said.
“The transition is widely regarded as one of the true global megatrends and represents the most significant, long-term investment opportunity within the climate change complex.”
This opportunity is also buoyed by the fact that fossil fuels are finite, Neiron said, with oil and gas reserves predicted to be deleted within the next 50 years. Additionally, fossil fuels are also becoming more expensive to use than their clean energy counterparts.
Neiron believes CLNE to be the first of its kind in Australia, as it’s the only “pure-play exposure to the world’s largest companies involved in clean energy.” He also noted that the ETF had benefited from recent geopolitical tensions in Eastern Europe.
“Global clean energy stocks have risen sharply recently with the Russia/Ukraine war and associated sanctions cutting supplies of oil and gas, pushing up prices, creating an increased demand for clean energy and creating another accelerator for the transition away from fossil fuels,” he said.
“CLNE has surged over 11% since the Russian invasion of Ukraine”
Want to learn more about Decarbonisation?
Livewire’s Decarbonisation Megatrend Series brings you feature articles that go deep on carbon-neutral investing, alongside special episodes of Buy Hold Sell, a megatrend investing podcast and interactive panel sessions with leading fund managers. To visit our Series page, please click the link below.