There are a variety of ways for market participants to invest in climate change, and the evolution of this investment concept in the exchange traded funds arena is a primary driver of that abundant menu of choices.
Still, investors desiring climate change-related investments need to be judicious; not all of the ETFs in this group are all they’re cracked up to be. Some analysts and industry experts believe that funds with direct clean technology exposure are best suited as climate change investments, and that could be a plus for ETFs such as the SPDR Kensho Clean Power ETF (CNRG).
“As climate-focused funds continue to grow in popularity, one question keeps investors up at night: How much of my portfolio is actually addressing climate change?” wrote Morningstar analyst Alyssa Stankiewicz. “In a recent study, we found that climate funds in the U.S., which we define as those with a branded, climate-focused investment mandate, offer more bang for the buck in terms of addressing climate change. Leading the pack in delivering exposure to climate action are clean energy/tech funds, followed by climate solutions funds.”
When it comes to clean tech exposure, CNRG has the goods. The ETF follows the S&P Kensho Clean Power Index, which focuses on companies “whose products and services are driving innovation behind the clean energy sector, which includes the areas of solar, wind, geothermal, and hydroelectric power,” according to State Street.
In fact, clean tech funds may be the most levered to companies that are prioritizing climate change, indicating that CNRG is a relevant choice for investors seeking that exposure.
“Indeed, clean energy/tech funds lead the pack with nearly 60% of assets allocated to companies with exposure to Climate Action. This is followed by Climate Solutions, then Climate Conscious and Green Bond, and finally Low-Carbon funds,” added Stankiewicz.
CNRG helps investors with another issue: avoiding exposure to companies that may have some climate change credibility, but may also have the potential for environmental, social, and governance (ESG) risk. An efficient avenue for reducing that risk is by minimizing allocations to sectors with questionable ESG reputations, which CNRG does.
“Interestingly, some climate funds with higher exposure to Climate Action also have higher exposure to environmental, social, and governance risk (as measured by lower Morningstar Sustainability Ratings). Some of the most impact-aligned companies, those which are innovating technologies to drive the transition to a low-carbon future, operate in industries that suffer greater risks related to stranded assets or ethical breaches along the value chain,” concluded Stankiewicz.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.