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When a sustainable investment underperforms

In aligning their investments with values, we often see faith-consistent investors including positive screening policies that target clean energy. However, this year’s performance of clean energy stocks may cause you to at least wince, and likely raise questions in your investment governance discussions. The S&P North America & Europe Clean Energy Index (a measure of the performance of 100 of the largest clean energy firms) has declined by nearly 26% year-to-date. The recent underperformance of the sector is a significant deviation from its historical trend, especially given the broader market's performance across the same period with the S&P 500 Index increasing by 19% and the S&P 500 ESG Index also increasing by 21%.


Amid this short-term performance downturn and despite the environmental urgency highlighted in reports like World Energy Outlook by IEA, where ...


“Today, the global average surface temperature is already around 1.2°C above pre‑industrial levels, prompting heatwaves and other extreme weather events, and greenhouse gas emissions have not yet peaked. The energy sector is also the primary cause of the polluted air that more than 90% of the world’s population is forced to breathe, linked to more than 6 million premature deaths a year. Positive trends on improving access to electricity and clean cooking have slowed or even reversed in some countries.”


Investors have withdrawn record funds from the world's largest clean energy investment vehicles in 2023. The iShares Global Clean Energy ETF (ICLN) experienced a net withdrawal of $765 million through August, marking the largest net outflow from that fund in any January-August period on record. This trend signifies a shift in investor focus, with many opting for sectors like artificial intelligence. These shifts suggest a reallocation of assets away from energy, even while the clean energy industry had outperformed other sectors, over the past two years.


In the same WSJ article, Simon Webber, a global equities portfolio manager at Schroders, notes the clean energy sector's vulnerability to interest rate fluctuations. This year’s clean energy downturn is attributed to macroeconomic factors, including global interest rate increases, supply chain disruptions, and a decrease in overall energy demand, within the US. Additionally, high-profile disappointments in key areas of the clean energy industry have played a role in investor sentiment.


Like any prudent investor, a faith-based asset owner should have a solid understanding of the market dynamics that can affect their investments and be well aware of the risk profile they have implemented in their portfolio. This year represents a challenging but notable deviation in the clean energy sector's trajectory. Recognising these shifts is crucial in maintaining investments that align with faith-based values and environmental goals, even as we navigate the complexities of economic trends.


But most importantly, faith-consistent investors should have a clearly articulated IP&G informed by their Beliefs Teachings and Values to support their investment decisions. This may be an especially reliable guide when sectors underperform, and fund flows turn negative. 

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