We look at ETFs for alternative energy, water and forestry.
To my mind, there are three reasons for looking at environmental ETFs.
The obvious motivation for investing in one of the select number of environmental ETFs is that it is, or should be, ethical. Another incentive for investing might be that these ETFs are fashionable (though at present that doesn't seem to be the case). Lastly, environmental ETFs should be able to attract investors for their sustainable returns. To my mind sustainability is the best rationale for environmental ETFs. After all, sustainability is the key for us, the planet and investments.
Progress needed with yardsticks
In contrast to the world of investment funds, there are no ready made lists of ethical or environmentally responsible ETFs.
More ETFs will have to track the existing choice of environmental stock indices such as FTSE4Good, ACT Australian Cleantech Index or the Dow Jones Sustainability Indices, if this type of investing is to become straightforward.
For the time being, although it's easy to create a shortlist of ETF trackers that might qualify as environmentally sustainable, you often still have to check out index constituents and use your own judgment.
Energy ETFs
The clean energy sector has four ETFs that track existing environmental indices. In order of assets under management these are: iShares S&P Global Clean Energy (LSE: INRG), the largest by a long way and also the oldest (launched in July 2007) , Powershares Global Clean Energy (LSE: PSBW), ETFX DAX Global Alternative Energy (LSE: ALTP) and db X-trackers S&P Carbon Efficient ETF (LSE: XGRD).
The last two are both very small and very recently launched, so it's probably too soon to evaluate their performance, let alone buy them. The DAX Global Alternative Energy Index only has 15 constituents while S&P's Carbon Efficient Index tracks a maximum of 375 of the lowest carbon emitters in the S&P 500. Given the high percentage of companies included, you could argue the environmental barrier has been set too low here.
iShares S&P Global Clean Energy ETF has been fairly volatile for much of its life, but for most of 2009 performance was flat. Reassurance about levels of oil and gas reserves seems to have dampened interest in clean alternatives despite the level of interest in climate change last year.
Powershares Global Clean Energy ETF tracks the Wilderhill New Global Innovation Index, which, in addition to having many more constituents, also contains a broader range of sectors.
Both these ETFs are heavily weighted to industrials and utilities but the Wilderhill index includes a wider range of IT companies and a significant proportion of manufacturers of consumer products. The iShares ETF can be subject to quite high premiums or discounts to asset values while the Powershares ETF is still very small and thinly traded. Neither has many UK constituents.
…And water?
Again, the largest water ETF is iShares S&P Global Water (LSE: IH20) followed by ETFX's Janney Global Water ETF (LSE: WATE), Lyxor ETF World Water (LSE: LWAT) and Powershares Palisades Global Water (LSE: PSHO).
The S&P Global Water Index has 50 constituents comprising chiefly water equipment and materials (such as chemicals for water treatment) and utilities.
The Janney Water Index has 60 constituents, split between utilities and infrastructure/technology while Lyxor ETF World Water tracks Societe Generale's World Water Index, which has just 20 constituents.
The Palisades Global Water Index currently has 31 constituents split between Industrials, utilities, IT and materials.
None of these water indices appear to make overt claims for the sustainability credentials of their constituents. Presumably, none of them are just pumping out water from irreplaceable desert aquifers, but beyond the respect that some ethical investment managers have for the indices, there appears to be no way of gauging constituents' contributions to sustainability.
In a class of its own
iShares is the sole sponsor of a UK-listed forestry ETF, iShares S&P Timber & Forestry (LSE: WOOD).
Though smaller than its clean energy and water stable-mates, with assets under management of roughly £21 million, its sustainability credentials seem fair. The index has 25 constituents, nearly all based in North America and almost all forestry corporations or real estate investment trusts (REITs). Most, if not all, of the constituents are meeting standards set by the Sustainable Forests Initiative (in North America) or the Forest Stewardship Council (for rainforests).
Some reservations
My first concern is that several of these ETFs may not generate enough investor interest to guarantee survival. Secondly, several of the indices are also relatively new. Should the indices be radically overhauled in future, you'd need to ensure you were happy with any changes made.
There seem to be more serious flaws in claims that exchange traded commodities (ETCs) tracking futures indices in areas such as agricultural products can meet sustainability criteria. The essence of ETCs tracking futures contracts seems to be hoarding and it's difficult to see how they contribute to sustainability.
Overall, while it seems difficult to argue with the idea of sustainable investment, when it comes to ETFs, it doesn't look like the tools are available yet.
More from Francis Groves:
Francis holds shares in iShares S&P Global Water.
