<img height="1" width="1" style="display:none;" alt="" src="https://px.ads.linkedin.com/collect/?pid=4496002&amp;fmt=gif">

Brown Energy Green

Photo by Lewis Meyers on Unsplash

A pragmatic approach to ESG and energy transition combines fossil fuels with decarbonization remediation solutions - in an active ETFA strictly “dark green” ESG investing approach may seek to avoid fossil fuels altogether. But the reality is that renewable energy cannot yet meet all of our energy needs, for various reasons.

 

The vagaries of the weather result in intermittency issues for wind, solar and hydro power, and battery technology cannot yet store enough power (at affordable cost) to tide us over during less windy, sunny or rainy periods. This means that the baseload power still needs to come from something like natural gas or perhaps nuclear.

The shortage of rare earths (which can be accessed through some other specialist ETFs from other providers) are another indirect capacity constraint highlighted by Horizon Kinetics, which has just launched launched Horizon Kinetics Energy and Remediation ETF (NVIR).

 

Meanwhile, hydrocarbons feed into a vast range of everyday industrial and consumer products, from furniture and floors, to cosmetics and pharmaceuticals, fertilisers and pesticides, soaps and washing items, clothing and sporting equipment. Completely avoiding fossil fuels would therefore be very difficult.

 

Horizon Kinetics argue that oil and gas – the only major S&P equity sector to produce positive performance in 2022 – remains an attractive space. Underinvestment in exploration and production will constrain supply and in a world of growing populations and economies, demand only very briefly dipped a few times in recent decades. And the sector still trades at roughly half the US average equity valuation, even after its 2022 performance. Therefore, Horizon sees scope for investors to “double dip”: enjoying both earnings growth from higher oil and gas prices, as well as valuation multiples expanding and reverting towards more historical norms.

 

Investors’ long term goals may still be to substantially replace fossil fuels with renewables, but this will require technological advances that could take decades. In the meantime, it may be more realistic to try and mitigate the carbon emissions from fossil fuels.

 

The first remediation is to ensure that the production processes for the oil and gas industry are more energy efficient, in areas such as recycling water, and using renewable electricity rather than “dirty diesel” to power equipment, platforms and engines. Another remediation angle - across the whole economy - is CCS - carbon capture and sequestration - which can involve huge projects to store carbon underground, or under the sea.

Active ETFs listed in the US have some choice over their frequency of portfolio disclosures. Active “non-transparent” ETFs can disclose holdings quarterly, but NVIR discloses them daily.

 

Its largest holdings are a range of US-listed conventional and shale oil and gas producers, including Cheniere Energy and Chesapeake Energy as well as a number of oil services companies such as Schlumberger, and a Canadian oil royalty company, Prairesky.

 

On the remediation side, names include a variety of water-oriented firms including water treatment firm Ecolab and water metering firm Badger Meter.

 

This strategy is actively managed by Peter Doyle, co-founder of Horizon Kinetics, and two analysts are listed. An expense ratio of 0.85% is comparable to actively managed open-ended funds. Time will tell if the strategy generates enough performance to be a better bet than simply combining a passive energy ETF with one or more passive decarbonization themed ETFs.

• Contact us

Have questions about this?

Speak to one of our ETF data specialists about how this applies to your fund range.

Get in touch

Bernie Thurston

Bernie Thurston is the founder and CEO of Ultumus, a leading provider of ETF and index data, calculation, and workflow solutions. With over 20 years of experience in financial technology, Bernie has been at the forefront of index and ETF innovation since 2003.

His finance career began at Markit, where as Managing Director for Equities he designed and developed products for index and ETF composition and dividend forecasting from 2003 to 2011. He then founded and led DeltaOne Solutions as Managing Director, building it into a global provider of index and ETF trading data and technology services. The company managed over 100,000 multi-asset class products before being acquired by Markit in 2015.

Following the acquisition, while working for an ETF issuer, Bernie identified fundamental issues in how index and ETF data was represented across the industry. This led him to found Ultumus in 2016, building solutions for ETF primary market operations. Under his leadership, Ultumus has grown into a market leader serving major financial institutions globally, with its ETF Order Management System (OMS) supporting create and redeem workflows worldwide and its PCF platform calculating and distributing portfolio composition files for ETF issuers across every major market.

Bernie sold Ultumus to SIX Group in 2021, where it continues to expand across Europe, North America, and Asia-Pacific. Known for building lasting teams and leveraging cutting-edge technology, Bernie is focused on establishing Ultumus as the backbone of the global index and ETF industry through standardisation and automation.

Related posts

Search SDG ETFs
ESG ETF  SFDR 9 Search