Sustainable investing is going through a rough patch, and this week’s announced production cuts by the Saudi-led OPEC+ energy cartel, which includes Russia, only added to the challenges that wind- and solar-loving investors are facing.
Can sustainable investing survive this onslaught?
Younger investors, in particular, have shown an interest in aligning their money with companies that address climate change and social inequity.
In 2021, assets in Canadian sustainability-themed mutual funds and exchange-traded funds nearly doubled from the previous year, to $34.5-billion, according to Morningstar.
Interest in this approach goes well beyond retail investors, though. The Canada Pension Plan Investment Board and Norway’s giant wealth fund, among other sophisticated institutional investors, are targeting net-zero carbon emissions for their holdings by 2050.
But a number of dramatic developments this year has made some aspects of sustainability look out of touch with reality.
Rising interest rates skewered the prices of many high-growth tech stocks that had felt the warm embrace of sustainability, raising questions about long-term performance.
Regulators have sought to tighten rules on what investment products can be marketed as sustainable, suggesting that the current approach may be murky and hyped.
And Russia’s invasion of Ukraine in February has disrupted energy markets, sending many European countries scrambling for natural gas and highlighting the importance of fossil fuels to energy security.
Stable energy sources within North America and Europe, long the enemy of many environmentally conscious investors, are looking increasingly wholesome; U.S. President Joe Biden’s decision to cancel the Keystone XL pipeline project, which would have transported Alberta oil to Midwest refineries, is looking increasingly silly.
This is not the scenario most investors likely had in mind when they steered vast sums to mutual funds and ETFs that select investments based on environmental, social and governance principles, or ESG.
Yet, for all this pushback against sustainability, there are some encouraging signs that investors are staying put and may even be rewarded in the coming years for their bets on clean and green.
For one, money is still flowing in.
“In 2022, we have seen a number of macroeconomic trends that we would expect to be headwinds for demand for sustainable funds, but that hasn’t borne out in the data,” Alyssa Stankiewicz, associate director of sustainability research at Morningstar, said in an e-mail.
Globally, net inflows into sustainable funds slowed to US$32.6-billion in the second quarter, down from net inflows of US$87-billion in the first three months of the year, suggesting that enthusiasm is cooling.
However, what’s more important is that non-sustainable funds suffered far more: These funds had net outflows of US$280-billion in the second quarter, a stark reversal from net inflows of US$141-billion at the start of the year.
What’s more, sustainable investing continues to enjoy some powerful tailwinds in the form of government policy, which could be good news for some stocks.
Credit Suisse estimated in late September that the U.S. Inflation Reduction Act, which addresses climate change through tax credits and incentives, could drive total public and private financing for green initiatives over the next decade to US$1.7-trillion.
“Already the largest fossil fuels producer, the U.S. is well-positioned to become a global leader in clean energy,” Credit Suisse analysts said in a note.
Renewable developers, residential solar, energy storage and some utilities appear particularly well-positioned for growth, the analysts added, pointing to stocks like NextEra Energy Inc. and Canada’s Brookfield Renewable Partners LP.
Finally, there’s relative performance to consider. For all the focus on the strong gains – and rising dividends – of fossil-fuel producers in recent months, the broader performance of sustainable investments has been encouraging.
The iShares Global Clean Energy ETF, an exchange-traded fund that holds US$4.9-billion in stocks like Enphase Energy Inc., Vestas Wind Systems A/S and SolarEdge Technologies Inc., has been an outperformer during these turbulent times.
The fund, though down 13 per cent in 2022, has outperformed the struggling S&P 500 Index by more than 11 percentage points this year. Over the past three years, the Clean Energy fund has gained about 67 per cent, compared with just 23 per cent for the S&P 500.
Sustainable investing is facing a number of challenges right now. But the approach appears to be on solid ground.
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