Thematic Way to Go in Search for Clean Energy Exposure

When it comes to accessing clean technology and green energy stocks in broad-based form, investors might find that the best option is thematic exchange traded funds. That’s likely a tough pill to swallow at a time when such assets are struggling, but there’s potentially long-term viability in the approach.

Long-term could be the best way to view ETFs such as the KraneShares MSCI China Clean Technology ETF (KGRN), but the fund certainly does fit the bill, as a thematic fund given its focus on Chinese clean tech equities. That’s pertinent for investors seeking exposure because they’re unlikely to find it in broader equity indexes.

“We found 1.2% of the companies in the MSCI ACWI index and S&P 500 qualify as clean energy. For the MSCI Europe, only 2.8% qualify. This approach is even more restrictive than selecting only ‘Achieving’ companies in the NZ:AAA framework,” according to BNP Paribas research.

KGRN Has Thematic Goods

KGRN, which follows the MSCI China IMI Environment 10/40 Index, is pertinent when considering the above factoids from BNP Paribas. On a related note, KGRN’s utility is meaningful because traditional China indexes, such as the MSCI China Index, typically lack meaningful clean technology/green energy equity exposure.

Additionally, KGRN has the obvious benefit of excluding fossil fuels, something that isn’t true of many standard China equity benchmarks. That’s potentially advantageous, because fossil fuels exposure — at least when oil prices are low — is a drag on emerging market funds.

“Investors may use exclusion strategies to both manage the risk of stranded assets associated with the energy transition and address climate change by putting pressure on fossil fuel companies to shift their focus,” added BNP Paribas. “Empirical research has shown that fossil fuel divestment can lower the stock prices of companies with a higher carbon intensity, and that those same companies subsequently reduced their carbon emission intensity after divestment.”

While strategies such as KGRN lack breadth and can introduce investors to some level of tracking error risk, ETFs of this ilk serve the benefit of delivering on exposure to clean energy technologies such as wind, solar, and hydroelectric power.

“From a sustainability point of view, these portfolios rank highly, with some of the lowest carbon intensities, the highest exposures to companies qualifying as SFDR sustainable investments and the highest exposure to companies passing the EU Taxonomy criteria,” concluded BNP Paribas.

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