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Go green in investing, look at overseas ETFs

According to reports, thematic investing is not an unknown animal to Indian equity investors, whether they are dabbling in stocks directly through stock exchange brokers or through equity schemes of domestic mutual funds. But there is one particular theme which is particularly new and futuristic for Indian investors but which has been on offer to investors in several international equity markets.

This theme is renewable — or clean — or green — or sustainable — energy investing. It primarily involves investing in companies engaged directly or indirectly in the production of renewable energy such as solar power and wind power. These include companies engaged in manufacturing of equipment used for the generation of renewable energy, or companies engaged with developing the technologies connected with renewable energy production, or companies which are beginning to substitute the use of conventional energy with renewable energy.

The first aspect to take into account by any investor is to agree with the rationale behind seeking a clean energy exposure in their investment portfolio. With Kyoto protocol mandates on governments worldwide to reduce carbon emissions and more being demanded by United Nations’ climate change conferences, businesses in the developed countries have little choice to but to use renewable energy sources. This makes green investing not just a fad with expectations that it will become among the fastest growing financial sectors but it is gradually becoming a market reality.

The second question which needs addressing by investors is the returns one can make out of it. The alternative energy theme is not for the short-term investor and neither is it for the conservative investor. Only investors with medium- to high-risk appetite and a long-term investment horizon can seriously think of investing in this theme.

But can Indian investors deploy a part of their investible equity corpus in this theme? The answer is yes and no.

Domestic mutual funds which do offer a range of thematic schemes in the equity funds category have till date not offered any thematic fund on renewable energy. “On green energy investing, I do not have investment vehicles to suggest to my clients. We do not have any mutual fund options — there is no fund of funds on this theme,” Gaurav Mashruwala, a certified financial planner practitioner.

Equity fund manager at Quantum Mutual Fund, Atul Kumar, said domestic companies in the business of renewable energy are far and few in the universe of listed companies in domestic stock exchanges. According to Kumar, global competition in solar energy and wind energy, and particularly the China factor, has made it difficult for domestic companies to generate revenue or justify the cost of capital.

Taken together, the scenario of clean energy investing is very restricted for investors looking for a domestic exposure immediately.

The international arena is, therefore, the only immediate option before Indian investors. “Except theoretical, there is nothing on ground here and investors looking for clean energy investing have to take their money outside,” said Mashruwala.

The only time a domestic mutual fund came close to offering a green energy theme was in the form of a global fund of fund (FoF). In March 2008, Benchmark Mutual Fund, which got taken over by Goldman Sachs later, had filed a draft offer document with Securities and Exchange Board of India to launch a global FoF which would invest in a global ETF. Known As Global Clean Energy Fund, the global FoF would have invested in specified clean energy index-linked ETF or ETFs. But Sebi did not permit Benchmark MF to launch this global FoF.

Among hundreds of thematic indices globally, there are a few dozen focusing on clean energy or renewable energy stocks. Investing options are found in over a dozen index funds or index exchange traded funds (ETFs) which invest in the component stocks of some of these indices. It is generally and procedurally the least difficult and least expensive to invest in ETFs listed on international stock exchanges such as NYSE, London Stock Exchange, Singapore Exchange and Deutsche Borse.

To be able to buy one or more of these ETFs, investors can open overseas trading accounts with a handful of domestic brokerage firms through their international partner brokerage firms.

As per Bloomberg data, there are at least 21 ETF products focusing on environment-friendly themes. As of March 7, four of them had clocked one-year returns ranging from 62 per cent to 93 per cent and another 10 had given one-year returns of 20-45 per cent. Three others were seen to have given a 10-20 per cent return and three ETFs had seen losses with one-year returns ranging from zero per cent to -10 per cent.

Retail investors without access to professional advisors need to do their homework before choosing the right ETF. Higher short-term returns are not necessarily the best indicators for a sustained good performance.

One of the avoidable risks in green energy investing is to eliminate any ETF which tracks an index having as its components stocks which are only remotely connected with renewable energy. Since green energy investing is a fashion in developed markets, there are some indices which claim to be made up of clean energy stocks but a closer look reveals serious problems in their composition.

There are numerous sources of information and guidance available on the web so investors need to sift the wheat from the chaff.

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