Rebecca O’Connor, head of pensions and savings at Interactive Investor and author of The ESG Investing Handbook, says now that the sector is maturing, there is greater diversity of opportunity within renewables-focused funds.
“There really is more to them than wind and solar, although it’s reasonable to expect these more established renewable technologies to remain a decent proportion of the mix,” she adds.
“Investors interested in this area might be interested to further understand the dynamics of renewable energy – how these technologies generate long-term revenue, for instance.”
Baynes agrees that thematic funds have gained a lot of exposure of late, and until more recently, they had been a major success story in terms of returns due to their high exposure to tech and growth.
But as inflation has come to bite amid the global pandemic and significant supply shortages, many thematic ETFs and thematic-based funds have suffered significant falls as investors adjusted their future earnings expectations.
This is all happening at a time when central banks are embarking on a period of fiscal tightening as they increase interest rates in the hope of curbing inflation.
But Baynes cautions against knee jerk reactions. He explains despite the falls, it is important to remember that investing thematically, in ETFs or otherwise, is not a short-term game, as many thematic ETFs or thematic-based funds are centred on multi-decade mega-trends that threaten to disrupt the economic landscape.
He adds: “We are likely to see the death and birth of entire industries in the coming years due to advancements in automation, robotics and artificial intelligence, the transition to clean energy and as populations in the developed nations become 'top-heavy' due to demographics.
“While thematic investing can be a great way to convey a conviction in the long-term prospects of a certain industry or theme, it can be susceptible to bubbles – the dotcom bubble springs to mind.
"As with any investment, it pays to know what is being bought and investors should research what the thematic fund is investing in as the name may not always reflect what is being held; something that is particularly true of funds with socially responsible investing (SRI) or ESG in their name.
"You’d be surprised what some of these ESG and SRI funds actually invest in. Many of the battery and electricity storage-related funds have a significant exposure to China, for example."
ESG premium
David Merriam, co-manager of the sustainable managed portfolio service at Tilney Smith & Williamson, says amid the acceleration in the shift to renewables, investors need to be careful of valuations when looking at renewables assets.
