SPDJI’s next consultation could prompt BlackRock clean energy ETF zenith

Incorporating the entire, ostensible clean energy value chain would make INRG and ICLN even more formidable

Jamie Gordon

a row of wind turbines

BlackRock’s two clean energy products are the two largest ETFs of their kind on the market, however, following a change of direction during the recent rebalance, it may take another consultation from S&P Dow Jones Indices (SPDJI) for the strategies to cement their dominance.

In the wake of immense popularity since the election of Joe Biden as US president, SPDJI were compelled to overhaul their 14-year-old index to shield vast sums of new assets from liquidity and over-concentration concerns.

As a by-product of the subsequent changes, we have witnessed the triangular trade-off between diversification, liquidity and theme purity as SPDJI introduced large-cap, non-clean energy pure plays to the underlying index tracked by the iShares Global Clean Energy UCITS ETF (INRG) and iShares Global Clean Energy ETF (ICLN).

As Patrick Thomas, head of ESG investments at Canaccord Genuity Wealth Management, said: “On the face of it, the idea of increasing the stocks from 30 to [82] seems sensible if it does not sacrifice theme purity. 

“The scoring methodology matters and the point is it will be unlikely a company with low revenue purity will have a significant weight in the index.” 

Despite the largest holdings still in renewable utilities, there is a clear mood change in the ETF’s ‘clean’ zeitgeist.

Aside from incorporating firms that do not have clean energy as their primary business, the rebalance added Xinjiang Goldwind, a majority Chinese state-owned enterprise with potential exposure to Uyghur forced labour. Also, 2.2% of the strategy’s business involvement directly violates the United Nations Global Compact, according to MSCI ESG Research.

Needing more than a temporary fix

Investors should view the recent changes to INRG and ICLN as a band-aid rather than a panacea. In future, efforts should be focused on best capturing the ETFs’ underlying theme, as any creep towards further generalisation would undermine their raison d’etre. 

Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, stressed the importance of theme purity.

My main suggestion would be to ensure the purity stays as high as possible, likely through trying to squeeze out the largest weight possible to those names without impacting liquidity metrics,” he explained. 

However, granular products with high clean energy purity already exist such as the Invesco Global Clean Energy UCITS ETF (GCLE) with its basket of 141 securities. 

So, rather than just adding more renewable energy utility companies, SDPJI said it may hold another consultation to discuss greater coverage of the clean energy value chain and emerging markets-listed stocks.

The former point is particularly significant. Should the indexer agree to a broader definition of clean energy business, it could incorporate segments such as marine energy, alternative fuels for vehicles, energy storage, energy efficiency, or smart gridwithin its clean energy benchmark, according to recent analysis by Société Générale.

SocGen said they would welcome these changes as they would make the index a more accurate representation of clean energy segments. More importantly, these changes could see BlackRock’s ETFs cover areas previously targeted by distinct ETF classes – renewables utilities, battery storage, even emissions reduction – and bring them into one, all-encompassing strategy. This would be a recipe for INRG and ICLN to secure long-term dominance.