Wealth DFM: Can you tell us more about clean energy as an area within ESG?
Chris Mellor: It is a fascinating area. Clean energy is at the forefront of the fight against climate change. We’ve seen a lot of headlines recently in terms of government commitments on climate activity and driving decarbonisation. There was the recent virtual summit led by the US that saw a number of countries, including the U.K., coming out and tightening up their emissions reduction targets and committing to greater investment to meet those emissions reduction targets.
Perhaps we should just clarify the scale of reductions we’re talking about in order to meet the Paris aligned expectations of limiting global warming to only one and a half degrees, you’re talking about halving emissions relative to the starting reference dates by 2030.That’s becoming a much closer target to achieve. Then there’s moving to net zero by 2050. The key thing here is that technology is going to be the key to solving that climate conundrum.
When people think about clean energy, the first thing most people would think about is renewables, like wind, solar, hydroelectric, geothermal, those kind of power sources. And obviously, those are a key part of the solution. But there are other parts of the technological equation that are required to meet those climate reduction or climate improvement goals, such as efficient energy transfer and storage. Indeed, much of the focus is on generating, storing and using energy from renewable sources but also reducing the amount that we waste in terms of energy losses as part of the system is also equally important.
Wealth DFM: With clean energy, how can investors get exposure to this as an asset class within the investment spectrum? What are the ways to do that?
Chris Mellor: There are a number of different approaches to this but most of them boil down to finding and identifying stocks that offer significant exposure to the clean energy space. There were nuances between the different approaches out there. The approach that we’ve taken at Invesco with the ETF that we launched this year is to track or to aim to track the original global clean energy index. It’s an index launched by a company called Wilder Hill who are the sponsor of the index we’re tracking. This index is designed to identify stocks that offer the best exposure not only to the renewable portion of the energy sector that we’re talking about, but also to those other key technologies like energy transfer, energy storage, improvements in efficiency etc.
As an investor, another key thing to focus on is understanding how meaningful the exposure is to these themes. There is a risk that if you end up with too many large utilities with not enough exposure to clean energy, you’re perhaps not doing the job you’re looking to do in terms of getting that exposure. The approach that Wilder Hill take in index construction is only to include selected stocks that have meaningful exposure to those themes whilst also at the same time minimising exposure to fossil fuels. So there is still a conundrum, a difficulty here. It’s that very often some of the largest investors in clean energy may also be some of the largest polluters today. The key for the Global Energy Innovation Index that we’re tracking is to avoid those traps and to make sure that we’re getting much more of a pure play exposure to the clean energy theme.
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