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Clean-Energy Stocks Are Being Diluted by Huge Cash Inflows

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By Tim Quinson

(Bloomberg) —

The surge of money flowing into clean-energy stocks may be increasing the risks posed to investors in the sector–both of the financial and greenwashing sort.

After soaring 142% in 2020, the S&P Global Clean Energy Index has dropped 23% this year. Despite the market swings, the money keeps pouring in. BlackRock’s iShares Global Clean Energy, the largest exchange-traded fund in this space, has attracted more than a net $2.8 billion since the start of 2021–even as the ETF posted investment losses.

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The iShares fund tracks the S&P Global Clean Energy Index, and its giant inflows helped lead to an overhaul of the market benchmark. There were 30 stocks in the S&P Global Clean Energy Index until it was revamped in April because too much money was chasing too few stocks. Now, there are 81, and the number may rise to as many as 100.

While the new additions have bolstered the index’s diversity and liquidity, they’ve also resulted in the inclusion of companies that aren’t the cleanest of energy producers. Before the adjustments, the S&P Global Clean Energy Index had the purest “clean energy exposure score” of 1. Today, the average-weighted score is closer to 0.85.

Therein lies the conflict. Hefty equity investments don’t necessarily correlate with the creation of the cleanest of clean energy. In total, about $12 billion now tracks the S&P index, and that figure has jumped more than 10-fold since the start of last year.

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Read more: Global Energy Crisis Shows Fragility of Clean-Power Era

The changes in the index have left “the purest of investors between a rock and a hard place,” said Patrick Wood Uribe, chief executive officer of Util, a London-based firm that uses machine-learning models to pinpoint companies that are positively and negatively impacted by the United Nations’s 17 Sustainable Development Goals (SDG). “Index providers have had no choice but to mitigate concentrations risks by sacrificing some of the theme’s purity.”

The S&P sought to explain its index’s less-than-pure-green membership. The average-weighted score will be closer to 1 by April when more companies are added to the index, including some from the emerging markets, according to Ari Rajendra, senior director of strategy indices at S&P Dow Jones Indices. 

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“Things are changing fast in the clean-energy industry,” he said. “Even the so-called dirty companies are more transparent about how they’re making the green transition because they fully recognize the long-term importance of having high clean-energy scores.”

The five most significant SDGs for environmentally-oriented investors are “clean water and sanitation”; “responsible consumption”; “climate action”; “life below water”; and “life on land.” Of all the more than 75 sustainable funds evaluated by Util, at most only five scored positively on all five of the main environmental SDGs, he said.

The funds that are truly clean-energy focused include Domini Sustainable Solutions and Cushing Global Clean Equity, according to Util. The iShares fund made the list until the recent changes of the S&P index. Now its placement isn’t so clear.

Sustainable finance in brief

Wild west of ESG is ripe for a crackdown, veteran investor Matt Patsky says. Dumping stocks to punish bad corporate behavior has a tiny impact. Al Gore’s $36 billion investment fund calls time on oil money. Greenwashing crackdown has fund managers being more careful about using “ESG” in company filings.  Global energy crisis drives U.S. coal prices to a two-year high.

Bloomberg Green publishes the ESG-focused newsletter every week, providing unique insights on climate-conscious investing.

©2021 Bloomberg L.P.

Bloomberg.com

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