Issues surrounding climate change and environmental impact have been a hot topic of conversation in recent years, as institutional and retail investors look to boost their portfolios with more sustainable investment options to lower their investment carbon footprint.
Recent macroeconomic turbulence has affected several capital markets, as companies struggle to stabilize their bottom-line performance against the backdrop of wider economic and political uncertainty.
Despite having to navigate difficult market conditions, investors are continuously looking towards more sustainable investment options, particularly at companies that promote environmental and social business practices.
The growing widespread popularity of green technology systems and programs comes at a turning point, where consumers are now demanding more environmental transparency from companies and governments are introducing droves of climate policies that are helping to unleash a flood of capital that aims to achieve global net-zero emission commitments.
Today’s investors have become more climate-conscious compared to their predecessors, with research showing that around 43% of UK investors want increased portfolio exposure to green tech and sustainable programs.
While private equity markets were roiled by soaring interest rates, inflation, dried-up investment pools, and droves of widespread layoffs throughout much of last year, climate-related private-market investments managed to outpace the broader market last year.
Industry research by McKinsey shows that between 2019 and 2022, private-market equity investors launched over 330 new sustainability impact funds, largely driven by the increase in environmental, social, and governance (ESG) investing policies.
Total cumulative assets under management in these private funds grew from $90 billion to more than $270 billion by the end of last year.
After all, public support from the United States and European governments has further boosted capital funding for the green technology sector.
Last year, the U.S. government passed the Inflation Reduction Act (IRA) which will allocate close to $400 billion in sustainable funding. Across the water in Europe, the EU Green Deal could help boost local efforts by allocating €1 trillion in public and private funds.
Swelling market activity and allocation of available funding from public and private markets could see the market reach $9 to $12 trillion in annual investments by 2030 according to an estimate by McKinsey.
Advancements in technology, such as Artificial Intelligence (AI), Machine Learning (ML), and Natural Language Processing (NLP), including systems like Software as a Service (SaaS), the Internet of Things (IoT), and regenerative finance create an ever-growing diversified investment market.
What’s more, the green technology sector encompasses different pockets of sustainable business ventures, which aims to direct capital funding from public and private markets towards advanced climate-oriented technology and net-zero emission commitments.
Among these packets is agriculture, which has introduced numerous companies and startups that aim to produce and cultivate agricultural produce that uses less space, fertilizer, and water.
The alternative protein market has also gained momentum in recent years, with the Swiss-based startup, Planted, producing plant-based meat alternatives. These efforts could help minimize the need for agricultural land use worldwide by 80%.
3D printing is another green technology sector that has the potential to alleviate carbon offset and the widespread environmental impact of the construction industry. Companies like Relativity Space, which can 3D print rockets and their engines using fewer parts and materials could be an alternative for the rapidly expanding aeronautics and space industry in developed nations.
Traditional green technology categories in sustainable energy, including solar, wind, and hydropower remain a stronghold investment opportunity for companies and investors that are aggressively looking to diversify their portfolios and seemingly move away from fossil fuel-based investment.
Despite a slowdown in the broader market, climate-related private equity markets have become one of the most in-demand categories for investors looking to build a more sustainable and diversified portfolio on the back of positive capital returns.
The heightened awareness of green technology activity has further inspired rising investment in the green tech sector to grow at an annual rate of 210%, according to estimates by PwC.
Expectations go even further, as Blackrock CEO Larry Fink for example predicts that the next 1,000 unicorn companies will be in the green energy sector.
Growing optimism, surging investments, increased capital funding, and government-backed efforts could create more mainstream opportunities for green tech to outpace the broader market in the coming years. And for investors eager to ride out negative periods of economic downturn, while endorsing sustainable investments, here’s a look at some of the best green tech ETFs investors can add to their watchlist this year.
The iShares Global Clean Energy Fund (ICLN) allocates a majority of its holdings to clean energy producers in the solar, wind, and renewable energy sector. ICLN focuses on target access to clean energy stocks from around the world, which in return gives investors broader diversification to alternative energy companies.
Additional exposure is directed to semiconductor and semiconductor equipment, heavy electrical equipment, multi-utilities, electronic components, and specialty chemicals. These sectors have seen steady performance over recent years, with ICLN outperforming the benchmark S&P Global Clean Energy Fund (INDEXSP: SPGTCLEN) over the last decade, only to decline by 8.04% in the last month, with SPY outperforming the iShares fund by 0.35%.
Another broad clean and green tech fund – Invesco WilderHill Clean Energy ETF (NYSEArca: PBW) – allocated 90% of its assets to common stocks, with a majority stake in industrials, information technology, and consumer discretionary sectors.
A majority of the fund focuses on holding small-cap firms and uses a growth strategy investment approach to outpace broader market turbulence.
Small-cap growth comprises 45.96% of the fund, with mid-cap growth holding 13.28%, and large-cap growth 4.56%. Diving deeper, the fund allocated its biggest asset allocation of 2.75% to Naas Technology Inc (NASDAQ: NAAS), an electric vehicle charging service provider. Other asset allocations in common stocks include Bel Fuse Inc (NASDAQ: BELFB), FTC Solar (NASDAQ: FTCI), and Sunnova Energy International (NYSE: NOVA).
The fund holds a diverse selection of common stock options, but its large allocation to industries might seem a bit risky for smaller novice investors, as this market segment tends to be more exposed to volatile market conditions compared to other diversified options.
The First Trust NASDAQ Clean Energy Smart Grid Infrastructure Index (NASDAQ: GRID) follows several high-performing clean energy tech companies that focus on gin and electric energy infrastructure, a recently developing sector that has growing upside potential as countries across the globe aim to move towards renewable energy sources in the coming years.
By the end of last year, GRID had more than 80 holdings in the fund, with Schneider Electric (OTCMKTS: SBGSY) holding the biggest share at 9.1%. Second to this was Eaton Corporation (NYSE: ETN) with 8.8% and ABB (NYSE: ABB) holding an 8.6% fund share.
Overall, the ETF is exposed to several different sectors, including electrical components, which make up a majority of the asset allocation at 26%, renewable energy, semiconductors, and engineering and contracting services which also hold a smaller percentage of the fund.
Compared to the MSCI World Industrials Index, S&P Composite 1500 Industrials Index, and Russell 3000 Index, this fund has managed steady performance, with an upside of 12.23% in the last three-month trading period.
There are however some adverse concerns relating to this fund, including volatile economic conditions in both the U.S. and Europe, where a majority of the fund’s assets are currently invested. Ongoing political tension in these areas could hold greater risk in the near term for the fund, which in turn could slow down the performance of large-cap companies.
This ETF is an interesting hybrid option for new-age investors that are looking for broader market exposure to lithium-ion battery manufacturing companies. Although the fund only holds about 40 companies in its portfolio,
Overall fund breakdown comprises materials (42.99%), consumer discretionary (21.44%), information technology (19.00%), and industrials (16.57%). Some of its key holding companies include Albemarle Corp (NYSE: ALB) and the Chinese-based battery firm, Eve Energy.
Interestingly enough China makes up the majority of the funds’ geographical breakdown, with 36.46%. Second to that is the U.S. at 22.09% and then South Korea at 12.26%. These three countries have been headlining the lithium battery industry over the last several years, as demand for EVs has skyrocketed since the pandemic.
The fund is the right combination of raw industrial and advanced green technology for investors that have been looking to jump into an industry that has seen steady growth during the last few months despite the wider economic slowdown.
For something a bit out of the ordinary, the BlackRock World ETF holds a diverse portfolio of companies operating outside of the U.S. that supports the transition to clean and renewable energy.
Although the fund is not directly situated as a green tech ETF, it is however a smart pick for investors that’s looking to add a layer of ESG-based investment efforts to their portfolios.
Overall, year-to-date (YTD) performance is up by 9.85%, with the fund having more than 375 holdings in its portfolio. Different holdings include firms such as consumer goods company Nestlé (OTCMKTS: NSRGY), which focuses on ethical and responsible material sourcing, among other well-known firms.
Finance (19.03%), industrial (15.03%), healthcare (11.94%), consumer discretionary (11.21%), and consumer staples (9.68%) comprise the top positions of the funds’ overall breakdown, with other asset allocation to materials, real estate, utilities, energy, and communication.
While it’s by no means a clean energy ETF like the others on our list, LCTD gives broader exposure to different market segments and companies that offer long-term potential with sustainable goals and business practices.
Given the current market conditions, green energy and clean tech ETFs have presented investors with a bigger upside compared to the overall market benchmark.
While volatile market conditions continue to put pressure on the majority of companies and the broader market, investors are snapping up green tech ETFs as they provide ongoing growth potential, backed by private and public equity.
The coming years could only further boost these funds in popularity, as companies make the transition to clean energy, and introduce wider environmental, social, and corporate governance practices as public demand grows even wider.
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