Investors in funds dedicated to renewable energy and more broadly to ESG (environmental, social and governance) securities have seen their investment underperform in 2022, unlike in previous years. Anomaly or harbinger of what awaits them?
For example, CIBC’s Clean Energy Index Fund has delivered a total return (including dividends) of -25% since its inception in November 2021. Comprised of North American securities, the exchange-traded fund (ETF) is among its top holdings Northland Power, First Solar and Brookfield Renewable Partners.
For comparison, the Canadian stock market index had a negative total return of 6.55% in 2022. The American S&P 500 index did much worse at -18.51%, including dividends paid.
The difference in 2022 performance between the Canadian market and the US market is the heavy weighting of oil and gas stocks in the Canadian index. The same can be said of the difference between the return obtained by the clean energy ETF and that of the flagship index of the Canadian stock market.
“The main reason for the gap is Ukraine/Russia,” explains Sylvain De Champlain, President of De Champlain Financial Group. Russian oil valves have been closed because of the embargo. This means that in 2022, the price of oil has increased, doubled in a certain period. This explains why oil has performed so well,” says the financial planner.
Indeed, the equally weighted oil and gas sub-index of the S&P TSX returned 33% in 2002 and 65% in 2021. Over five years, the average annual return is less spectacular, however, at 6. 85% per year.
Another factor that has worked against renewable energy stocks is their high level of debt, according to Michel Lafontaine, an active investor and retired economist. He gives the example of Boralex, a Quebec company active in renewable energies.
“Long-term debt has nearly doubled over a five-year period, from $1.7 billion in 2016 to $3.4 billion in 2021, and that’s where high interest rates come in,” he said. it, in an email.
Renewable energy companies, often small or medium-sized and growing rapidly, are very strongly impacted by a rise in interest rates which reduces their profits, because they have a lot of debt.
Sylvain De Champlain, President of De Champlain Financial Group
On the other hand, continues Mr. De Champlain, “the oil companies [comme Canadian Natural Resources et Suncor] are huge companies with tens of billions in market capitalization. With the price of oil doubling, silver is rushing in. Whether interest rates go up by 3 or 4 percentage points doesn’t affect them,” he argues.
“The difference between the two situations explains the relative poor performance of ESG funds compared to oil,” summarizes Mr. De Champlain.
As one can imagine, not all ESG funds have lost 25% of their value in one year, far from it. Mr. De Champlain’s Favorite ESG Fund, NEI’s leading environmental mutual fund, posted a negative return of 17.5% in 2022. Over five years, its average annual return is 4.97%.
This is a fund focused on US and international equities, with no exposure to clean energy, let’s emphasize. Its main positions are Linde, Waste Management, Agilent Technologies.
At Desjardins, the balanced portfolio of the SocieTerra family of responsible investment funds achieved a return of -12.9% during the first 11 months of 2022. The average annual return over five years is 2.3%, i.e. 50 basis points higher than the return of its benchmark index. The SocieTerra Balanced Portfolio is 50/50 comprised of global equity funds and fixed income funds.
The performance of the renewables sector has outperformed oil stocks in 7 of the past 10 years, including 2022.
Marie-Justine Labelle, responsible investment director at Desjardins
The SocieTerra family has approximately $9 billion in assets under management, down year over year due to last year’s negative performance. Net purchases of shares still remained in positive territory in 2022, assures Desjardins. Almost a third of Desjardins fund clients also hold SocieTerra funds.
And for 2023?
Mr. De Champlain and Mr.me Labelle does not want to comment on the return outlook for 2023 at a time when key rates in Canada have never been so high in nearly 15 years.
“It will be easier to say after the first quarter, when we will have seen the effects of the rise in interest rates and the evolution of the geopolitical context”, advances Mme The beautiful.
Both show long-term optimism. “Interest in responsible investing isn’t slowing down,” observes Ms.me The beautiful.
“Oil will decrease in the next few years, and renewable energies will grow,” says Sylvain De Champlain. When the Caisse de depot decides that there will be no more fossil fuels in Quebecers’ woolen socks, that’s what I like to hear. »
- Year in which the Caisse de dépôt et placement du Québec announced its withdrawal from oil securities
Source: Caisse de depot et placement du Québec