Clean Energy & Sustainable Infrastructure ETFs Shine
By: Andres Rincon
October 19, 2022 - 2 Minutes
When it comes to ESG, many investors are still of the view that the ESG space is mostly limited to institutional investors. Originally, institutions were instrumental in the launch and growth of ESG ETFs. Since the COVID pandemic, the user mix did shift to include more flow from retail and wealth as ESG factors became more relevant to a broader set of investors. For retail investors however, the ESG pitch remains a complex one – an investor concerned with mortgage payments may have limited appetite to embark on the long journey of climate change with their dollars as opposed to short-term returns. Recently, a select group of ESG ETFs is putting the return question to rest with strong outperformance. ETFs focused on clean energy, and sustainable infrastructure companies have seen stellar performance throughout the recent recovery in global markets. The magnitude of the recent moves and performance is highlight worthy as it helps these ESG ETFs quash any concerns around returns whilst implementing their ESG mandates.
Clean Energy and Sustainable Infrastructure ETFs Show Stable Returns
After a disappointing first half of 2022, investors saw some market recovery in Q3. While only 6% of Canadian ETFs have posted a positive performance in the first three quarters of 2022, over 26% have reported a positive return in Q3. ESG ETFs focusing on clean energy and sustainable infrastructure also stand out as offering a stable return amid a volatile market. These ETFs on average reported a return of -7.6% from Q1 to Q3, much higher than the average of -15.8% for all Canadian-listed ETFs and similarly for broad equity markets in North America. Notably, these ETFs performed well in Q3 2022 with an average return of 6.5%, while the average Canadian-listed ETF only delivered a return of -2.0% over the same period.
Why the Strong Performance?
There are several potential explanations for the strong performance of these ETFs, but it all comes down to demand. These funds invest in real assets or energy (traditional or clean) sectors, both of which have contributed to a strong performance this year. Both sectors have benefitted from a global energy interruption caused by geopolitical tension. Specifically, soaring energy prices and the Russia-Ukraine war made the need to reduce energy reliance and move to a green economy more urgent. As a result, clean energy and sustainable infrastructure ETFs have benefited from wide support and investment from governments and institutions into these industries. Although energy prices have fluctuated this year, the performance of such ETFs has remained stable, largely supported by the long-term commitments of major sovereigns and institutions to a green economy.
Continued Interest in ESG ETFs
Clean energy and sustainable infrastructure ETFs have accumulated new assets of $131mm in the first three quarters of 2022. The focus on the green economy has also benefited other ESG ETFs. Overall, ESG ETFs have accumulated over $2.2bn in new assets between Q1 to Q3. In fact, ESG ETFs were able to attract new assets in April, May, and June when the broad market experienced significant pullbacks. This is a sign of resilience and long-term support for ESG ETFs despite weaker markets. As investors continue to flock to ESG ETFs, issuers have been keen to launch new products. Since the beginning of the year, 35 new ESG ETFs have launched in Canada, accounting for 29% of total new launches. We expect the ESG ETF shelf to continue to grow given the increasing interest from investors and relatively strong performance of some ESG ETFs.
Director and Head of ETF Sales & Strategy, TD Securities
Director and Head of ETF Sales & Strategy, TD Securities
Director and Head of ETF Sales & Strategy, TD Securities
