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.