The Goldman Sachs Bloomberg Clean Energy Equity ETF was created earlier this year, in February 2022. It seeks to invest in companies working toward energy decarbonisation using an index delivering exposure to firms that are linked to the production of clean energies or their democratisation through the construction of clean power infrastructures. While there are some noteworthy features to this ETF such as its custom-made index and high involvement with the utilities sector, there are some important drawbacks which have led me to award this fund 1.7 planets. These include their investments in companies that have negative impacts on the environment as well as companies that are not committed to accelerating change by finding more sustainable alternatives.
The portfolio’s sector breakdown is quite interesting for a fund whose primary goal is to invest in clean energy. The top three sectors are utilities (40.5%), industrials (26.4%) and information and technology (20.8%). It is surprising to not see the energy sector in the top 3 sectors for a clean energy fund, as it means that the fund is not prioritising the development of energies; in fact, it only comes 6th and makes up about 2% of the portfolio. This may be explained by the current volatility of energy prices due to the ongoing crisis in Ukraine. This is a hard trade-off that fund managers have to make and while I would prefer for them not to gloss over this sector as it is essential for the energy transition, I think that it is preferable to lower investments in the sector for now instead of losing investors in ESG funds because investments are not viable. However, I was happy to see that the utilities sector came first, as investing in the development of infrastructures that can bring clean energies to people is essential to energy decarbonisation.
The fund is made up of a large number of holdings (183) and none of these makes up a big part of the investments, which I take as a precautionary measure in case one particular investment does not perform well. This is a great measure for an ESG fund in my opinion, as it reduces risks for the investor making the fund more attractive to them. Nonetheless, their top holding is controversial when it comes to sustainability. Contemporary Amperex Technology Co LTD specializes in the manufacture of lithium-ion batteries for electric vehicles and energy storage systems. While lithium has been used a lot to create new more sustainable products such as electric cars, we cannot call lithium-based products sustainable. Lithium mining has catastrophic impacts on the planet and communities due to a large amount of water required to process it, preventing local farmers from using it and also polluting the water supply with toxic chemicals such as hydraulic acid.
In the top ten holdings, we also find a few companies (e.g. NextEra Energy Inc, Sempra and Iberdrola) invested in the production and transportation of natural gas. Natural gas is a fossil fuel, and hence not renewable, yet the European Commission has decided earlier in 2022 that power plants burning natural gas count as sustainable investments. The alternative (coal) might be worse, yet I do not think that a sustainable fund should invest in companies that still deal with natural gas as these companies do not strive to accelerate energy decarbonisation by finding long-term sustainable alternatives. This is why I also regret finding Samsung as one of the top ten holdings as it does not appear to be one of the drivers of energy decarbonisation.
I awarded the fund 1.5 planets for this section as for a fund committed to driving the transition towards energy decarbonisation, it could invest more in the energy sector and companies actively involved in accelerating the change, while also avoiding companies that have large negative impacts on the environment.
This ETF uses a custom-made index to select the companies it invests in. The index was designed by BloombergNEF in partnership with the Goldman Sachs Asset Management team. The use of a custom-made index is a good sign that the company is committed to finding the best investments, as it is using some of its own resources to build it.
The index is designed to “deliver exposure to companies that are expected to have a significant impact on energy decarbonization through their exposure to clean energy which includes, but is not limited to, clean power infrastructure (generation, transmission and distribution), solar energy, wind energy, energy storage, hydrogen energy, energy digitalization and bioenergy.”. The methodology is very well documented on Bloomberg’s website, which is usually a good sign that the firm is committed to achieving its goals in terms of sustainability.
However, I believe that some aspects of the selection process could be improved. Some of the selection criteria are noteworthy: the exclusion of the largest 15% of carbon emitters that do not have Net Zero commitments and those that do not follow ESG principles (e.g. companies invested in Tobacco or firearms). The index also excludes companies that derive less than 10% of their values from clean energy, and assigns a more significant weighting to the companies that derive a higher percentage of their values from clean energy. Despite this, a 10% threshold seems a little low when the aim of the index is to deliver exposure to companies with a significant impact on energy decarbonisation, as this allows (as is openly indicated on the website) for investments in companies that have operations that involve traditional energy sources (including oil and gas), which in my opinion goes against the aim of the fund. Nonetheless, the index closely monitors the holdings’ activities and is thereby reconstituted and rebalanced quarterly, which indicates a desire to find sustainable investments over time.
The fund has two managers: Raj Garigipati and Matthew Maillet. Not much information is available about them, other than their experience in finance. It does not seem that either of them has experience in sustainability which is a little disappointing, as it can lower our confidence that the fund is truly dedicated to sustainability over profit. I was also not able to find further information on the team such as age, gender, race, and ethnicity which are all important characteristics in deciding the sustainability of the firm.
The use of their own index allows them to score a bit higher in this section, as it suggests the firm’s good intentionality. The index is made both by energy specialists from the Energy Infrastructure & Renewables Team and BloombergNEF whose main focus is to provide strategic research on the transition toward a low carbon economy. The creation of this fund fits in with Goldman Sachs’ commitment to invest $750 billion in building a more sustainable world.