Mutual Funds: Investing In Renewable Energy's Future

As the world shifts its focus to sustainable solutions, renewable energy has become an increasingly attractive investment opportunity. Mutual funds, which pool money from multiple investors to purchase securities, provide an accessible way for individuals to invest in this burgeoning sector. By investing in companies that generate energy from sources such as wind, solar, and hydropower, green energy mutual funds offer investors the chance to support sustainable practices while potentially earning long-term returns. This introduction will explore the best-performing renewable energy mutual funds, the benefits of investing in this sector, and key considerations for prospective investors.

Clean energy ETFs

• Xtrackers Net Zero Pathway Paris Aligned US Equity ETF
• TCW Transform Systems ETF
• IShares Climate Conscious & Transition MSCI USA ETF
• SPDR MSCI USA Climate Paris Aligned ETF
• SSGA SPDR S&P 500 Fossil Fuel Free ETF
• IShares Paris-Aligned Climate MSCI USA ETF
• Invesco Solar ETF (TAN)
• IShares Global Clean Energy ETF (ICLN)
• Invesco WilderHill Clean Energy ETF (PBW)

If you're looking for the biggest clean energy ETF, that's ICLN, with over $2 billion in assets under management. This fund has an expense ratio of 0.41%, and the fund earns a high “AA” MSCI ESG score, which measures the fund against environmental, social and corporate governance factors.

Other clean energy ETFs with over $1 billion in assets under management include TAN and First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN).

Top green energy mutual funds in India

India's renewable energy sector has been attracting significant attention and investments in recent years, and mutual funds offer a great opportunity for individuals to contribute to this growing industry. Here are some of the top green energy mutual funds currently available in India:

Tata India Smart City Fund

This mutual fund invests in companies that are expected to benefit from the rapid growth and development of smart cities in India, including those in the renewable energy space. The fund's portfolio includes companies involved in energy efficiency, sustainable building practices, and renewable energy generation. Some of the key investments made by this fund include solar power projects, smart grid technologies, and energy storage solutions.

Reliance ETF Renewable Energy

Reliance ETF Renewable Energy is an exchange-traded fund that tracks the Reliance Renewable Energy Index. This fund provides exposure to a diverse range of companies operating in the renewable energy sector, including wind, solar, hydro, and bioenergy. By investing in this fund, individuals can gain access to some of the leading renewable energy companies in India, such as Suzlon Energy, Solar Industries, and Tata Power.

SBI Mutual Fund – SBI Magnum Multicap Fund

While this is a multi-cap fund, SBI Magnum Multicap Fund has a significant exposure to the renewable energy sector. The fund invests in a diverse range of companies, including those in the renewable energy space, offering a balanced approach to investors. Some of the key holdings include top renewable energy companies like ReNew Power, Hero Future Energies, and NTPC, offering a mix of established and emerging players in the industry.

Aditya Birla Sun Life Mutual Fund – ABSL Pure Value Fund

The ABSL Pure Value Fund is another multi-cap fund with a strong focus on the renewable energy sector. This fund aims to identify undervalued companies with high growth potential, and its portfolio includes a mix of established and emerging players in the renewable energy space. Some of the key holdings include Wind World (India), Waaree Energies, and Premier Energies, offering investors exposure to both wind and solar energy segments.

HDFC Mutual Fund – HDFC Hybrid Equity Fund

For those looking for a balanced approach, the HDFC Hybrid Equity Fund offers exposure to both equity and debt instruments, with a focus on the renewable energy sector. This fund invests in a mix of large, mid, and small-cap stocks, including those in the renewable energy space, offering diversification benefits. Key holdings include Suzlon Energy, Tata Power, and Hero Future Energies, covering different aspects of the renewable energy value chain.

These mutual funds offer Indian investors an opportunity to participate in the country's growing renewable energy sector, providing exposure to a diverse range of companies and technologies. Individuals can consider investing in these funds to support the transition to a cleaner and more sustainable energy future while potentially generating attractive returns.

Please note that mutual fund investments are subject to market risks, and one should carefully consider their investment objectives and risk appetite before investing. It is always advisable to consult a financial advisor to determine whether a particular mutual fund is suitable for your investment needs.

Thematic-Energy Mutual Funds

• DSP Natural Resources and New Energy Fund: This fund was launched on April 25, 2008, and aims to generate capital appreciation and provide long-term growth opportunities. It invests in equity and equity-related securities of companies involved in the discovery, development, production, or distribution of natural resources, as well as the alternative energy and energy technology sectors. The fund emphasizes renewable energy, automotive and on-site power generation, energy storage, and enabling energy technologies. As of February 28, 2023, the Assets Under Management (AUM) were Rs. 672.81 crore, and the minimum investment required is Rs. 500.
• Tata Resources & Energy Fund: Launched on December 28, 2015, this fund seeks long-term capital appreciation by investing at least 80% of its net assets in equity/equity-related instruments of companies in the resources and energy sectors in India. The AUM as of February 28, 2023, was Rs. 232.18 crore, and the current Net Asset Value (NAV) as of March 27, 2023, is Rs. 27.14. The minimum investment required for this fund is Rs. 5,000.
• ICICI Prudential Energy Opportunities Fund
• SBI Energy Opportunities Fund

When considering investing in Thematic-Energy Mutual Funds, it is important to keep in mind that they can be volatile in the short term due to their investment in equities. However, over the long term, the risk is substantially reduced. These funds have delivered an average return of 28.26% per annum in the last 5 years, with 3 and 10-year annualized returns of 21.64% and 19.55% respectively.

Fossil-fuel-free funds

According to Morningstar Research Services LLC, there were 303 sustainable funds as of the end of 2019, up from 270 at the end of 2018. However, only a small fraction of these funds completely avoid investing in fossil fuels. By their definition, only 10% of diversified sustainable equity funds are not involved with fossil fuels.

Fossil Free Funds, a project of As You Sow, is a search platform that helps individuals understand the climate impact of their mutual funds and make sustainable investment decisions. The platform analyzes the fossil fuel exposure and carbon footprint of thousands of U.S. mutual funds and ETFs, allowing investors to align their investments with their values.

Some examples of fossil-fuel-free funds include:

• State Street ETFs: These funds use the term "Fossil Fuel Reserves Free" and exclude companies that own coal, oil, and natural gas reserves for energy purposes. However, they still have some overall fossil fuel exposure.
• Morningstar Low Carbon Designation: This designation is given to funds with lower-than-average fossil fuel involvement and low levels of carbon risk. 98 out of 303 funds received this designation at the end of 2019.
• SSGA SPDR S&P 500 Fossil Fuel Free ETF: This fund is one of the best-performing clean energy ETFs according to NerdWallet.

It's important to note that the definition of "fossil-fuel-free" can vary among funds, and some funds may still have exposure to fossil fuels even if they use the term "fossil-fuel-free." Investors should carefully evaluate funds using additional criteria to ensure they align with their values and investment goals.

ESG criteria funds

Environmental, Social, and Governance (ESG) investing is a way to screen investments based on corporate policies and encourage companies to act responsibly. ESG criteria are used to assess a company's responsibility metrics and standards for potential investments.

Environmental Criteria

This gauges how a company safeguards the environment. Investors evaluate corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals.

Social Criteria

This examines how a company manages relationships with internal and external stakeholders, including employees, suppliers, customers, and communities.

Governance Criteria

This measures a company's leadership, executive pay, audits, internal controls, and shareholder rights. It ensures a company uses accurate and transparent accounting methods and pursues integrity and diversity in its leadership.

ESG investing can be referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI). It helps investors ensure that the companies they fund are responsible stewards of the environment, good corporate citizens, and led by accountable managers.

Several financial firms offer ESG ratings and scoring systems to help investors identify companies that follow positive ESG principles. For example, MSCI has a rating scheme covering over 8,500 companies, giving them scores and letter grades based on their compliance with ESG standards.

Some investment firms, like Boston-based Trillium Asset Management, use a variety of ESG factors to identify companies positioned for strong long-term performance. Trillium's ESG criteria include investing in companies that support renewable energy sources and published sustainability reports, ethical supply chains, and board diversity.

• ESGV ESG U.S. Stock ETF
• VFTAX FTSE Social Index Fund
• VSGX ESG International Stock ETF
• VCEB ESG U.S. Corporate Bond ETF
• VBPIX Baillie Gifford Global Positive Impact Stock Fund
• VEOIX Global Environmental Opportunities Stock Fund
• VEIGX Global ESG Select Stock Fund

Thematic-Energy Mutual Funds

Thematic-energy funds are equity mutual funds that invest in stocks tied to a theme, such as energy. These funds are broader than sectoral funds as they pick companies and sectors united by an idea. While they can be high-risk, they may be suitable for aggressive investors with a long-term investment horizon. Examples include:

• DSP Natural Resources and New Energy Fund
• Tata Resources & Energy Fund
• ICICI Prudential Energy Opportunities Fund
• SBI Energy Opportunities Fund

Frequently asked questions