How to profit from the clean energy revolution

How to profit from the clean energy revolution
The global megatrend towards decarbonisation could be a very attractive place to make money.

The battle for AGL (ASX: AGL) between billionaire and noted renewable energy fan Mike Cannon-Brookes and the current management team has brought one thing into sharp focus.

That is the globally the megatrend towards decarbonisation is something that will last for decades and could be a very attractive place to make money.

We shouldn’t be fooled that Mr Cannon-Brookes is only acting out of the goodness of his heart in opposing the controversial split up of AGL – as the biggest shareholder in the company after his unsuccessful bid to take it over he is doing his best to make money out of this megatrend and to accelerate the move out of producing electricity by burning coal.

Kicking a double goal – making money and reducing global warming

Who can blame him, there is a lot to be said for kicking a double goal by helping to boost the uptake of renewable energy and making a handsome profit at the same time.

You may not want to wade into this particular corporate battle in the hope of making some money out of riding the green energy megatrend, but there is no shortage of other more diversified investment products that could be an excellent way to combine ethics and juicy investment profits.

Trillions of dollars needed to reach net zero

The OECD estimates that US$6.9 trillion a year will be needed up to 2030 to reach the now widely agreed target of net-zero emissions by 2050, which is a massive spend that is virtually mandated even if we are nowhere near it yet.

One of the best ways to invest in this shift is to use one or more of the specialised exchange traded funds (ETFs) specifically designed to surf this trend.

The way they do this is a little different though because two of the five ETFs are active – that is they are run like a normal managed fund in which a fund manager buys and sells various stocks in an attempt to outperform.

The other three use the more expected method of using an index to base their purchases on, making them truly passive financial instruments.

Active ETFs more costly but could outperform

As you would expect, the management fees on the active ETFs are a little higher than those charged on the passive ETFs, so those fund managers need to pay back those extra fees in the form of better performance.

The two active funds are the Janus Henderson Net Zero Transition Resources Active ETF (ASX: JZRO) and the Munro Climate Change Leaders ETF (ASX: MCCL) which have a management fee of 0.85% and 0.9% respectively.

The Janus Henderson fund invests in a portfolio of global equities made up of resources companies across the supply chain positioned for the transition to a low-carbon future.

The hope is that the concentrated portfolio of companies selected for their contributions to the transition to net-zero will also generate long-term returns.

That includes companies in the energy, mining and agricultural sectors that will be essential in helping the transition to a low carbon economy, with a focus on electric vehicles and renewable energy solutions including batteries.

The Munro Climate Change Fund is designed to invest in 15 to 25 global growth “climate winners” that will help enable the decarbonisation of the planet.

Unlike an index fund, the idea of this ETF is to focus on a much smaller number of companies that are in the best position to perform well in the shift to net zero.

These areas include clean energy, clean transport, energy efficiency and the circular economy.

As an active fund though, even those these areas can change over time should the managers want to jump on another trend that might arise over time.

Even the passive funds have differences between each other because they follow different indexes.

A big range of companies

BetaShares Climate Change Innovation ETF (ASX: ERTH) has a management fee of 0.65% a year and follows the Solactive Climate Change and Environmental Opportunities Index.

That means it invests in up to 100 leading global companies that get at least half of their revenues from products and services that help to address climate change through the reduction or avoidance of carbon dioxide emissions.

By contrast ETF Securities Battery Tech and Lithium ETF (ASX: ACDC) has a management fee of 0.69% a year and tracks the Solactive Battery Value-Chain Index.

As the name suggests, that means it is invested in 32 companies that are either providers of electrochemical storage technology or mining companies that produce metals that are primarily used for the manufacturing of battery-grade lithium batteries.

The final ETF is the VanEck Global Clean Energy ETF (ASX: CLNE) which has a management fee of 0.65% and tracks the S&P Global Clean Energy Select Index.

Clean energy has jumped with the Ukraine conflict

VanEck has invested in a portfolio of 30 of the largest and most liquid companies involved in clean energy production and associated technologies globally across developed and emerging markets.

That has been a rewarding space with shares in clean energy companies jumping in the aftermath of the Russian invasion of Ukraine.

While the five ETFs all offer slightly different exposures and methods of selecting stocks, what they do have in common is the ability to profit from a megatrend that could be with us for many decades as the world rapidly ramps up efforts to decarbonise the world economy.

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