After heavy losses, company valuations in climate exchange-traded funds are more attractive to new investors. This is how to use them in a portfolio.
Investing for climate change has been a portfolio disaster in 2022. Many sustainability-themed exchange-traded funds have underperformed.
Investors neglecting climate change could be left with stranded assets or companies with a higher cost of capital because they emit more carbon. Julia Lee, Asia Pacific equity investment strategist for State Street Global Advisors SPDR, says investors must act on climate change. “The world faces a choice on how we respond to climate change, not whether we respond. There will be consequences for capital markets and investors whatever track our planet takes.”BHP Group got agreement from the board of OZ Minerals
Sustainability is a loosely defined term for ETFs. By assets, sustainability ETFs are dominated by funds that invest in Australian and international companies with higher environmental, social and governance ratings. In Australia, 48 sustainability-themed ETFs held more than $9.2 billion at the end of October 2022, BetaShares analysis shows. Since mid-2020, the volume of these ETFs has increased fivefold and their assets have quadrupled.
The BetaShares Climate Change Innovation ETF has lost 31 per cent over a year to end-November. The VanEck Global Clean Energy ETF is down 15 per cent over one year.These and other climate ETFs present challenges for investors. Thematic ETFs can be concentrated in a low number of stocks, reducing diversification and increasing risk.
But some private-wealth management firms advise against using ETFs for sustainability investing. “ETFs are too generic for this type of investing,” says Hamilton Wealth Partners managing partner Will Hamilton. “Investors have different values. One might not want to invest in the mining sector; another might be comfortable with that.”
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