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Three key takeaways

  • Investor interest in clean energy has surged in 2020
  • Renewable energy stocks have outperformed traditional energy stocks in 2020 due to economic, societal and regulatory forces (see Figure 2).
  • Stimulus spending and policy support could further accelerate global demand for clean energy

Investment strategies focused on renewable energy are growing rapidly as global investors pay more attention to sustainability issues such as the megatrend of climate change and resource scarcity. Inflows into U.S.-listed clean energy-themed exchange traded funds (ETFs) have been $954 million year to date, up from $890 million last year and $190 million in 2018.1

Figure 1: Annual inflows into clean energy-focused, U.S.-listed ETFs

Chart: Annual inflows into clean energy-focused, U.S.-listed ETFs

Source: Markit (as of July 22, 2020)

Legacy energy stocks wane while clean energy stocks shine

Part of the excitement surrounds recent performance. Clean energy stocks have delivered strongly positive returns in 2020 as traditional energy sources, such as oil and gas, have experienced sharp declines amid a broad economic slowdown.

The S&P Global Clean Energy Index has outperformed the S&P Global Energy Index by 60 percentage points and outperformed the S&P 500 Energy Sector Index by 33 percentage year to date.2

Figure 2: Energy stock index total returns

Chart: Energy stock index total returns

Source: Bloomberg (as of July 29, 2020). Chart depicts July 29, 2017 to July 29, 2020). Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Waning demand for traditional energy sources is part of a long-term megatrend premised on governments, businesses and investors paying more attention to energy efficiency and climate risks. It’s also playing out in the stock market. Within the S&P 500 index, energy stocks accounted for more than 13% of total market value in 2008 but the sector has since dwindled to represent only about 2.6% today; Exxon Mobil was the second-largest company in the S&P 500 index by market value just five years ago but is now No. 31 by market value.3

To be sure, investing in clean energy stocks has had its ups and downs in recent years. The S&P Global Clean Energy Index has underperformed the S&P Global Energy Index at times, especially when renewable energy has faced restrictive regulations, such as the introduction of U.S. tariffs on imported solar cells and components.

A global trend in clean energy investing

The recent policy response to the coronavirus pandemic has shown the increasing resolve of policymakers worldwide to address climate change.

The European Union earmarked billions of euros for green industries, such as renewable energy, clean transport, hydrogen power and energy-efficient building renovations, as part of the 750 billion–euro EU recovery plan, building on a pledge to turn the bloc into a carbon-neutral economy by 2050.4

Presumptive Democratic presidential nominee Joe Biden proposed $2 trillion in federal clean energy infrastructure spending over the next four years. This could significantly expand the less than $100 billion annually that currently goes to clean energy technologies, driving additional growth in renewable energy industries.5

In emerging markets, China is the world’s largest producer and consumer of renewable energy and has reduced carbon dioxide emissions for two consecutive years. China’s government also recently announced a 10 billion-yuan ($1.4 billion) project to build 48,000 charging stations to promote electric vehicles.6

Gauging the impact of climate change risks is not only an increasing priority for governments, but also for the private sector. For example, 2019 marked the record for the highest volume of renewable energy power purchase agreements by corporates globally.7 The shift to renewable energy production, and the emergence of technological innovations such as electric vehicles, present long-term investment opportunities for asset owners and strategic opportunities for businesses.

Accessing clean energy opportunities with ETFs

For U.S. investors ETFs can offer efficient and cost-effective access to global clean energy companies. They can help investors seeking to capture a climate change and resource scarcity megatrend energy while also advancing sustainability goals.

Figure 3: S&P Global Clean Energy Index breakdown by industry

Chart: S&P Global Clean Energy Index breakdown by industry

Source: Bloomberg (as of July 29,2020)

Chris Dieterich
Director, ETF Strategist and Commentator
Contributors: Jeff Spiegel and Sarah Kjellberg
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