Sustainable Investment in New Commodities: ESG-Focused ETFs

In recent years, sustainable investing and Environmental, Social, and Governance (ESG) considerations have gained significant importance among investors. As the world focuses on transitioning to cleaner and more sustainable practices, investing in new commodities such as clean energy and carbon credits has become an essential component of ESG-focused investment strategies. However, investing directly in these new commodities can be complex due to their novel and often highly-regulated nature. That's where ESG-focused Exchange-Traded Funds (ETFs) come into play, offering an accessible and familiar route to sustainability-focused investment.

ESG Investment and New Commodities

New commodity segments like carbon credits or solar energy are attractive areas for ESG-focused investment. However, investing directly in these commodities can be frustratingly complicated even for experienced commodity traders. The markets for these commodities often have limited opportunities for retail traders and focus heavily on governmental and institutional entities. Additionally, navigating complex regulations and understanding the intricacies of specific commodities can be daunting. Moreover, the lack of liquidity and volatility associated with the emerging markets can add further complexity to direct investing.

The ETF Solution

ETFs offer an interesting solution for investors seeking exposure to new commodities. Here are a few reasons why ETFs are particularly suitable for this kind of investment:

1. Market Familiarity: These investment vehicles allow investors to stay within the familiar realm of the stock market while gaining exposure to sustainability-focused commodities. No more dealing with the mind-boggling regulatory and product complexity of the carbon market!

2. Diversification: ETFs provide investors with diversified exposure to a basket of companies within a specific sector or theme. This diversification helps mitigate the risks associated with an individual asset’s performance and provides a broader exposure to the underlying commodity or industry. Instead of allocating all your funds to a single commodity asset, you can gain exposure to a variety of assets that ETFs are typically based on.

3. Liquidity and Accessibility: ETFs are traded on stock exchanges, offering investors the ability to buy and sell shares throughout the trading day at market prices. The relatively novel and highly regulated markets of new commodities cannot even come close to the liquidity levels that ETFs and the stock market offer.

4. Transparency: ETFs disclose their holdings on a regular basis, allowing investors to know which companies or assets they are investing in. This transparency aligns with ESG principles, enabling investors to align their investments with their values and sustainability goals.

ESG-Focused ETFs

Let's take a look at four innovative ESG-focused ETFs that provide sustainable exposure to new commodities:

1. Invesco Solar ETF (TAN):

The Invesco Solar ETF focuses on the solar energy sector, investing in companies involved in solar equipment manufacturing, installation, and project development. TAN provides investors with exposure to the growing solar energy market, supporting the global shift towards renewable energy sources. The ETF's holdings include leading solar energy companies such as First Solar and SolarEdge Technologies. In total, the cheekily named TAN is made up of 45 equity holdings.

2. iShares Global Clean Energy ETF (ICLN):

The iShares Global Clean Energy ETF seeks to track the performance of companies involved in clean energy-related businesses worldwide. ICLN invests in renewable energy generation, energy storage, and sustainable technology companies, capturing the potential of the clean energy industry. Compared to the TAN ETF above, ICLN has a more diversified composition, tracking 100 equities.

3. Invesco S&P Global Water Index ETF (CGW):

The Invesco S&P Global Water Index ETF focuses on companies involved in the water industry, including water treatment, infrastructure, and equipment providers. CGW enables investors to support sustainable water management and capitalise on global water scarcity challenges. The ETF's holdings include companies like Xylem Inc., American Water Works, and Essential Utilities. This ETF could be of interest to those who want to venture outside of the solar energy theme that typically dominates the sustainable ETFs niche.

4. Amplify Lithium & Battery Technology ETF (BATT):

BATT invests in companies involved in the lithium mining and battery technology industries. This ETF targets the growing demand for lithium-ion batteries, driven by the electric vehicle industry and energy storage solutions. As such, it is frequently viewed as a sustainability-oriented product.

This is one ESG ETF that has some truly top names in its holdings list. The ETF’s current top holding is Tesla, and other big names also include the world’s top miner BHP, Samsung, and Panasonic.

Sustainable investment in new commodities is quickly shaping up as a crucial element of ESG-focused investing. While direct investment in these commodities can be complex, ESG-focused ETFs provide an accessible and familiar route for investors to participate in this emerging market. To be an ESG-focused investor, you don’t have to stock up on carbon credits. Whenever feasible, consider the much less complicated ETF route.