Climate Change and "decarbonization"

sma3

I have been exploring funds focused on investing in "climate Change" which is a very nebulous focus, but essentially includes renewable energy, electrical efficiency, basic materials and minerals required for renewable energy, carbon capture, recycling, and mitigating the effects of climate change on society

I have tried to avoid ETFs and funds based on indexes as I believe this is essentially an engineering problem and requires active management to pick the companies most likely to be successful. An alternative is to use ETFs focused on minerals and resources required for renewable energy and electrification, like Copper, rare earths LIT etc.

There is not a specific category yet, I searched M* database looking for appropriately named funds. I have been able to find a number of funds, but most have limited track records, as they started in 2020 or 2021. NALFX has a long track record, and is widely available. Others to consider include GCEBX, RKCIX, HEOMX, and an ETF run my the group that put two climate activists on XOM board NETZ.

Vanguard recently stated a "Global Environment Fund" VEOIX and VEOAX run by a South African management company "Ninety One" mimicking the strategy in their existing fund ZGEIX at less cost. ZGEIX is supposedly available on many platforms, but not Schwab or Fidelity that I can determine.

GMO, prodded by Jeremy Grantham, has run a great fund for several years GCCHX, but it requires $1,000,000 minimum.

Another alternative is Valueline, which publishes a "Climate Change Portfolio" with about a dozen stocks with monthly reports for $200

Has anyone else looked into this?

msf

I did a little poking around when doing a writeup on ESG investing. Criteria and metrics are all over the map, so one needs to take care and understand the underlying methodology in looking at any scorecard. With all that said, a site I found useful (and one that Kiplinger lauds), is As You Sow - Invest Your Values.
https://www.asyousow.org/invest-your-values/

Lots of criteria with fund ratings and explanations. Here's their list of top fossil fuel free funds. Clicking on a particular fund will take you to a page that explains the letter score.
https://fossilfreefunds.org/funds

It really is important to go past the grade and understand what is going on. For example, it rates ZGEIX a 'D' on fossil fuels (though 'A' on all other ESG criteria). That low score comes from the fact that 5.51% of its portfolio invests in a single "bad" company, NextEra Energy (NEE).

Here are a couple of scorecards on NextEra Energy:

ClimateAction 100+ takes a very unfavorable view https://www.climateaction100.org/company/nextera-energy-inc/

Sustainalytics (a M* subsidiary) reports NextEra Energy's biggest ESG concern to be carbon.
https://www.morningstar.com/stocks/xnys/nee/sustainability

Is a 5.5% ownership stake enough to downgrade what appears to be an otherwise fine fund? Don't know.

With regard to New Alternatives, that's a fund I've loosely followed for a long time. Over the past several years it has performed well. My suspicion is that this reflects the world catching up to what it has focused on for decades.

As a mutual fund, it provides a rare window into marketing costs. You gave the ticker NALFX. Those are the older A shares, that come with a load. The newer, no load NAEFX shares have a higher ER due to their 12b-1 fee.

E*Trade sells NALFX NTF, and Schwab sells it TF, load waived. But these are likely new developments and most brokers sell it with the load. So an investor has a choice of paying for the transaction up front with a load, or paying it over time, with a 12b-1 fee. One way or another (except for E*Trade) one pays for the transaction service.

BenWP

@sma: I think it’s tough to know which stocks may benefit from efforts to confront climate change. IOW, who will be the the winners? I borrowed from another poster’s research into clean energy and have been following ICLN, QCLN, and TAN. The funds have underperformed tech in general. One obvious pitfall has been the horrendous stock performance of the group of EV manufacturers in recent months. Assuming EVs will eventually be part of the solution, it may be a while before the stocks reflect increased profits. I thought solar would be a good niche, yet it has proven to be a hard place to make money. DQ, the Chinese manufacturer of solar chips has been gored in recent months. I’m sure there will be winners, but what needs to happen first is that lots of people make substantial changes in their lifestyles. Many in developed counties will have to be content with less (smaller dwellings, fewer vehicles, less meat, etc.) and those in developing countries may have to lower their sights. If there’s a PM out there who has crystal ball-like predictions into who will prosper from such changes, please let her step forward to be showered with investors’ ducats.

catch22

Hi @BenWP
'If there’s a PM out there who has crystal ball-like predictions into who will prosper from such changes, please let '''her''' step forward to be showered with investors’ ducats.'

SALURE !

TAN (solar) held decent in 2022 among the 'clean' group. A -6.1%.

BenWP

Thanks for pointing that out, @catch22. QCLN was down 35% for 2022.

AndyJ

ICLN did pretty well too.

WABAC

I jumped in a couple of these discussions in times past:

https://www.mutualfundobserver.com/discuss/discussion/58867/climate-change-funds

https://www.mutualfundobserver.com/discuss/discussion/59881/clean-renewable-etf-s-are-you-there-now-or-considering-investing

QCLN has a large exposure to Tesla. And I specifically sorted out any ETF with a large exposure to that sort of consumer stock.

We are small-time investors. We throw nickels around like they were man-hole covers. M* Christine would be appalled at the number of investments we have in our multiple portfolios. But our small stake in alt-energy funds have mostly stemmed the tide since we bought them.

My wife has the most interest in alt-energy funds. And in mid-July I purchased TAN, ICLN, PBD, and GRID. Only PBD is down a little since then.

At the same time I suggested water. CGW and FIW have kept their heads above it.

ESG funds are a different kettle of fish. We have been having a rough ride with our Parnassus funds.

sma3

Thanks for all the useful information

@msf
NALFX available at Schwab without a load.
NEE has an enormous portfolio of renewable energy so it can really not be considered as fossil fuel dependent as other utilities.

I have not found ESG calculations at M* very useful, as they are too inflexible. "G" is so widely defined almost any tech company qualifies.

Making money on the alternative energy ETFs seems dependent on when you buy them, and the price, as always. That is one reason why I think an active fund has advantages.

A lot of the performance of many of these funds recently is dependent on how much TSLA they own. Active management can cut back large positions like this when they price gets too extreme, but even funds without TSLA have gotten burned last year. ZGEIX for example held onto Beyond Meat as it crashed but sold it before the third quarter.

There are other sources of information but most cost a lot. For example, "Thunder Said Energy" sends out daily emails about their extensive engineering based research, but charges $500 a report. The free charts are very useful, however. As an example, they list projected Lithium demand, or requirements to upgrade the electrical grid. This lead me to GRID, for example, which has number of positions that are critical to upgrading the power grid, many of them in other funds.

The jury is still out on the environmental impact required to implement alternative energy infrastructure. Minerals, steel cement are all needed in much greater quantities than traditional oil and gas extraction.

One point the people at Thundersaidenergy make over and over again, is that the "transition" to decarbonization will require A LOT of energy and fossil fuels. I think it is short sighted to eliminate all oil companies from your investments because they will do well in the near term.

I have small positions in PWO, LIT, REMX,GMET,TAN,FXC NLR as water and minerals and nuclear power will have to assume greater roles than oil and coal in the years ahead.

WABAC

@sma3. When I was doing the research, it was easy to find alt-energy ETF funds that excluded consumer durables. IIRC, that is the category that Tesla, and other EV makers, fall into. It's like looking for dividend funds that exclude REITS.

I'm also always irritated when I find Amazon in an ESG fund.

And all of the funds we bought get horrible grades from the site recommended by @msf.

In my experience, when I bought any fund is the single largest factor in how I feel about it years later.

Alt-energy and tech were at significant discounts this past year. TDV and CSGZX have held up reasonably well from our purchases in July. Purchases from 2021 don't leave us half so enthusiastic.

One question I ask myself is, "Are these things going to go away?" Another question I ask myself is whether I will be disappointed if tech, alt-energy, and health become as boring as consumer durables and utilities.

msf

And all of the funds we bought get horrible grades from the site recommended by msf. ... CSGZX ha[s] held up reasonably well from our purchase[] in July

CSGZX is 'A' rated on fossil fuels, is scored a 17 on carbon footprint and a 35 on carbon intensity, both low relative to benchmarks, and is 'A' rated in terms of deforestation.

WABAC

@msf I should have been more specific. PBD gets a B. TAN gets an A. ICLN and GRID get F's.

AndyJ

As You Sow has really upped its game in the last couple of years since I last visited there. Appears that it is important to look at the details of the ratings.

msf

As with star ratings or any other magic numbers, one needs look behind the numbers to better understand what they represent.

Somewhat like SRI funds that set very stringent de minimis thresholds on investing in "bad" companies, the sites I suggested grade on severe curves. Invest more than a little in "bad" companies, and your score goes down rapidly. It's still monotonic - the more a fund invests in "bad" companies, the worse its score. But it's a nonlinear scale.

To take ICLN as an example - fully 1/8 (12.49%) of its portfolio is invested in utilities selling or using fossil fuels. Half of that alone (6.22%) is invested in ConEd. Seriously?

Sure, ConEd has a "clean energy" subsidiary, ConEd Solutions. They used to offer me clean electricity as an ESCO, but that ended years ago. Now, all I can buy from ConEd as an electricity supplier is this mix (as of Dec 2020 - the latest info provided):
Biomass <1%
Coal 2%
Hydro 9%
Natural Gas 47%
Nuclear 36%
Oil <1%
Renewable Biogas <1%
Solar <1%
Solid Waste 3%
Wind 3%

Emissions relative to NYS average
SO2 113% of average
NOx 112% of average
CO2 113% of average

Needless to say, I buy electricity from a third party, not ConEd.

Carbon footprint? ICLN is off the charts, as measured by direct and indirect carbon emissions per dollar invested. You may disagree with FossilFreeFund's figure, but even MSCI's figure for the fund (also direct and indirect emissions), is still very high (nearly double that of the S&P 500 (IVV), per MSCI).
https://www.blackrock.com/us/individual/products/239738/ishares-global-clean-energy-etf

sma3

Thanks for reminding me of As you sow and fossilfreefunds and Climateaction100.org

The latter’s report on NEE is rather unclear. I also think that you have to avoid being too much of a purist. While NEE may still have a significant carbon footprint, it is apparently better than almost all other utilities.

AndyJ

ConEd is a head scratcher. I don't disagree with any of those details; not sure why you think I would.

On the other hand, PBD getting downgraded because one part of a tiny (0.72%) holding facilitates offshore oil and gas (while also facilitating offshore wind) seems a little harsh.

WABAC

FRNW has a similar mix of sectors as ICLN, minus Con Ed, plus a healthy dose of Hong Kong. It's only been around a few years. So it's entire track record is in the red.

More info from etf.com:

FRNW provides exposure to the global clean energy industry utilizing an ESG overlay. The fund specifically includes developed and emerging markets firms of any size that generate at least 50% of their revenue from one or more of the following business activities: clean energy distribution, clean energy equipment manufacturing, and clean energy technology. Eligible companies are initially assigned with ‘thematic relevancy scores’ based on a proprietary natural language processing algorithm—which identifies clean energy firms using keywords from publicly available company documents. Firms are then further screened for various ESG factors. The highest scored companies are selected for inclusion and are weighted by market-cap. The index rebalances quarterly.

That's good enough for a C from fossilfreefunds.

ICLN invests in global clean energy companies, which is defined as those involved in the biofuels, ethanol, geothermal, hydroelectric, solar, and wind industries. Aside from holding companies that produce energy through these means, ICLN also includes companies that develop technology and equipment used in the process. Selected by the index committee, the fund is weighted by market-cap and exposure score — subject to several constraints — and reconstituted semi-annually. Prior to April 19, 2021, the index followed a more narrow methodology.

Given the weight of utilities in both funds (56% and 52%), it's going to be hard to get good carbon grades. A plain old utility index, like VUIAX makes ICLN look like Mr. Clean.

sma3

Goldman Sachs has a long detailed analysis of the thinking behind GCEBX

https://www.gsam.com/content/dam/gsam/pdfs/us/en/fund-resources/other-reporting/GS_Clean_Energy_Income_Fund_Overview.pdf?sa=n&rd=n

that is worth reading. They have a significant number of companies that are "transitioning" to clean energy, most of which rate very poorly by Fossilfreefund. Page 38 shows that the fossil emissions of their companies have dropped by almost 50% but their carbon emissions are currently about average for the utility sector.

I think this approach makes more sense than relying only on an index of "clean energy companies" that by definition excludes any firm that is not exclusively in solar, wind, geothermal etc.

msf

FRNW has virtually the same carbon footprint as ICLN: 354 vs 358. Still off the chart.
https://fossilfreefunds.org/fund/fidelity-clean-energy-etf/FRNW/carbon-footprint/FS0000GZWZ/F00001AEZV

FRNW does invest a smaller percentage of its portfolio in fossil fuel-burning utilities, so it does score better by that metric than ICLN.

A significant part of a company's business can be "clean" while the company overall is still a bad actor. If decarbonization is your focus, then it may be better to look at a company's overall carbon footprint than to give it a good grade because part of the company is "clean".

msf

I think this approach makes more sense than relying only on an index of "clean energy companies" that by definition excludes any firm that is not exclusively in solar, wind, geothermal etc

Fossil Free Funds does not exclude sizeable utilities that use fossil fuels so long as that accounts for a minority of their revenue:

[Fossil Free Funds does not exclude] utilities that have fossil fuel operations but meet the criteria for inclusion on our Clean200 screen - USD revenue of at least $1 billion, and over 50% of total revenues are from green sources

https://fossilfreefunds.org/how-it-works

sma3

How many US Utilities are 50% renewal energy?

msf

Why would that matter? In any case, the point is that FossilFreeFunds does not "by definition" exclude any firm that is not exclusively in solar, wind, geothermal, etc. This looks like a straw man. Where did this come from? And why just US?

So long as there are any utilities (or if you prefer, US utilities) that are not exclusively into renewables but are still acceptable to FossilFreeFunds, that'e enough to show that FossilFreeFunds does not have the zero tolerance policy you described.

A 50% threshold is pretty far away from zero or even de minimis tolerance. Take, for example, Clearway Energy Inc. (CELN.A) According to its most recently posted 10-K (2021), 3/4 of its $12B in operating revenue is derived from renewables. Which means that 1/4 of revenue is still "dirty".

Praising the worst of the worst for "transitioning"? How far? It's easy to put up good numbers by picking the low hanging fruit - substituting something merely less bad.

what if the [100 dirtiest US] power plants simply reduced their emissions rate to the national average emissions rate of all power plants in the United States? That average rate currently sits at 454.7 kilograms per megawatt-hour, which would amount to a 46.46% reduction in total emissions.

What if our “100 Dirtiest” all switched their entire production to natural gas instead of coal and oil products? The national average emissions rate for natural gas power plants is 401.25 kilograms per megawatt-hour, which would be a 52.75% drop in the total emissions released by these plants.

https://findenergy.com/top-100-dirtiest-power-plants-in-the-united-states/#what-would-it-look-like-if-the-100-dirtiest-plants-made-a-change

It's going to take more than a single graph showing bad actors behaving less badly to impress. Not that the changes aren't for the better, but what comes next? And when?

LewisBraham

One interesting ESG fund is ECAT. It’s interesting not because the manager, BlackRock, has the best ESG standards for this fund. It doesn’t. It’s interesting because it’s a closed-end fund which under most circumstances doesn’t issue new shares of the fund. That means when you buy it, you are not giving the manager new money to support any fossil fuel companies’ stocks it may own and drive up their share prices. You are effectively opting out of supporting the money management industry as the fees the manager collects they would’ve collected on this fund, which has a fixed asset base, anyway. You are not encouraging them to buy another share of Exxon by giving them new money to invest.

Now because this fund is ESG focused, it doesn’t own Exxon anyway. On top of that it seeks investment opportunities in clean energy, including ones that are private venture capital ones not normally available to retail investors, only a small weighting right now.

As long as the fund is trading at a discount to its NAV, investors are not encouraging the manager to issue new shares to gather more assets and potentially buy companies that aren’t ESG friendly. The discount has been pretty deep lately. If it ever traded at a premium or the manager decided to issue more shares, it would be worth selling both for investment and environmental reasons. It would also be worth selling if the manager started leveraging the fund to a significant degree. Right now it is largely unleveraged.

sma3

The data on "fixing the dirtiest" is fascinating. I also heard today that the author (a Forbes employee) of a book about the meat industry "Raw Deal " calculates that if "plant based meat" and beyond meat etc reached 15% the same penetration of the meat market than non-milk products have now in the milk market it would be equal to eliminating the carbon produced by 25% of the cars in America!

Not surprising I guess when you realize that Cattle ranching accounts for about 30% of the land use in America and Domesticated livestock equal 60% of world's biomass


I am not familiar enough with Fossilfree methodology to know how they arrive at their determinations, where they draw the line, and how the measure plans of any company to improve it's fossil footprint, but I am glad you all reminded me of the site and will do some more digging.

There are so many moving parts here, and companies available, with rapidly changing prospects I think active management is probably better than index funds, unless you use index funds limited to particular segments like Solar, wind EV vehicles etc.

I also believe that this is an engineering problem, but almost all the funds seem to lack engineers who can evaluate new technology.

I lot of fund reports remain vague and not terribly useful.

@LB thanks for tip on ECAT. It is encouraging that BlackRock and Goldman Sachs and Vanguard are creating funds for this