Green energy funds top league table in banner year for ESG

The two US equity funds with the strongest returns in 2020 both focus on clean energy, in a vindication for investors who have sought out holdings with strong environmental, social and governance credentials.

The two funds — both run by the asset manager Invesco — have more than tripled in value thanks to a surge in the value of solar energy stocks, which themselves have enjoyed tailwinds from the heavy inflows into ESG investment strategies.

The Invesco Solar exchange traded fund, which has $3.7bn in assets, had risen 238 per cent since the start of the year as of Christmas Eve, topping a league table of US ETFs and mutual funds that invest in equities, as compiled by Morningstar.

Among the ETF’s top holdings are two providers of residential solar power, Enphase Energy, which has risen almost 600 per cent in value, and Sunrun, which is up 400 per cent.

The second-best performing fund was the Invesco WilderHill Clean Energy ETF, which has returned 220 per cent. One of its largest holdings is FuelCell Energy, which designs and makes power plants, whose shares have gained almost 400 per cent this year.

“A Joe Biden win combined with the rapid decline in renewable energy costs has contributed to further appreciation for solar and clean energy funds,” said Rene Reyna, head of thematic and specialty product strategy at Invesco.

In the wake of this year’s strong performance, “pullbacks should be expected”, Mr Reyna said, but he added: “The underlying fundamentals within the renewable energy sector support our view that we are in the early stages of a longer-term secular growth trend.”

Global funds that hold ESG assets have surged more than 50 per cent, beyond $1.3tn, since the end 2019, according to the Institute of International Finance, which said the trend had accelerated in recent weeks as investors anticipated active support from the incoming Biden administration.

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Illustrating the strategy’s banner year, an ESG fund places number five on the league table of inflows, by dollar amount, out of all the equity funds in the US.

BlackRock’s iShares ESG Aware MSCI USA ETF had attracted a net inflow of $9.3bn in the year to November 30, taking its total net assets to $12.7bn, according to Morningstar.

The fund is designed to broadly track the S&P 500, the benchmark US stock index, even as it eliminates shares from industries such as tobacco and companies with low ESG scores. BlackRock has pitched it to financial advisers and investors as an easy entry point to ESG investing, and has been among those arguing that accelerating inflows into such funds are creating momentum that will drive up popular ESG stocks.

“Companies with the highest ESG ratings collectively outperformed” during the pandemic market crash in March and beyond, said Romain Boscher, global chief investment officer for equities at Fidelity International. “We believe ESG adoption will only accelerate in 2021, especially as climate change moves up the agenda in the US.”

A clean energy index fund run by First Trust, which has assets of $2bn, is also in the top five best-performing US equity funds of the year, along with two from Ark Investment Management that focus on trends in technology, particularly innovations in healthcare and cloud computing.

“These are niche areas that are focused on innovation and that seems to have resonated for investors given the year we have seen,” said Tony Thomas, associate director of equity strategies at Morningstar. Meanwhile, he said, “ESG funds are picking up flows and I don’t see any reason for that to abate.”

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