17th May 2021
Bank of America note the centrality of hydrogen in the clean energy market
The clean energy sector, encompassing solar and wind energy production, biomass and nuclear power, and green hydrogen fuel, is helping to combat climate change while showing strong and continued growth at the same time, making it an excellent potential investment option for investors who value environmental, social and governance (ESG) factors. ETFs offer exposure to a range of companies in this growing space, but not all clean energy ETFs are the same. Bank of America’s recent report1 specifically emphasizes the potential of green hydrogen to achieve the environmental goals that consumers and governments are increasingly demanding.
Public demand for decarbonization and sustainable energy is growing, as the damage caused by fossil fuels becomes harder to ignore. In 2020 alone, there were 22 incidents that caused over $1 billion in damage, compared with an average of six per year between 2002 and 2010.2 By 2030, flooding will affect over 145 million Americans every year 3 ; wildfires are becoming more harmful, with twice as much land burned between 2000-2018 than in the previous 15 years 4 ; and natural disasters like heatwaves, avalanches, and droughts are all becoming more frequent.
High profile, disastrous energy failures during the California wildfires, Hurricane Sandy, and the recent snowstorm in Texas point to the unreliability of the fossil fuel grid and the need for more consistent renewable microgrids that provide backup for essential services. Clean energy infrastructure has proven itself to be more resilient than the national grid in the US, provides longer power availability during a crisis, and is better able to store excess energy and release it at times and places of peak demand.
Governments, international organizations, municipalities, and private corporations are all swinging round behind clean energy initiatives. 87 countries signed up to the Paris climate agreement to limit global warming to under 2°C by 2030, and many countries and cities set themselves deadlines to become carbon neutral. Clean energy is seen as the way forward.
Research conducted jointly by the UN, BloombergNEF, and the Frankfurt School-UNEP Centre concluded that around 826 gigawatts of new capacity in renewable energy needs to be constructed over the next 10 years to enable governments and corporations to meet their 2030 decarbonization pledges, adding up to around $1 trillion of global investment, or around $100 billion per year.5 Global investors who between them manage close to $7 trillion of assets plan to increase their investment in renewable energy infrastructure by close to 200% over the next 5 years to approximately $742.5 billion.6
At the same time, governments are putting into place policies that incentivize clean energy production and subsidizing infrastructure construction and initial rollout costs. In the US, for example, President Biden has committed to investing $400 billion in clean energy development like hydrogen fuel, renewable energy, and more efficient energy production from fossil fuels over the next 10 years.7
Bank of America have compared the hydrogen market for example, to the smartphone market pre-2007 or the internet just before the dot-com boom8 Public demand, institutional backing and technological advances are all aligning to create a market potentially worth $11 trillion over the coming thirty years.9 So what’s the best way to get exposure to this dynamic sector?
You could research individual companies to try to discern the market leaders with the greatest potential. Companies such as Plug Power, which is one of the first to offer a commercially viable hydrogen power solution, beginning with hydrogen fuel-cell-powered forklifts for indoor use. Amazon, Walmart, Home Depot, BMW, and Whole Foods are among their customers. Or Ballard Power Systems, the leading purveyors of fuel cell and clean energy solutions, which power thousands of zero-emission vehicles around the world, including the world’s first hydrail train in China. You could consider Mitsubishi Chemical, that pioneers the production of materials used in renewable energy systems and develops high-performance battery storage systems for electronic vehicles. Or Linde PLC, a global industrial gases and engineering company committed to energy production and environmental sustainability.
However, there are considerable risks in supporting any single company at this stage of the journey towards clean energy. While signs for sector growth are strong, there is no knowing which particular businesses will succeed in leading the space. We think clean energy ETFs give the ESG investor an attractive way to invest in the growing market for clean energy while mitigating some of the risk of over-exposure. Clean energy companies are still relatively new, and on their own may be a step too far in terms of risk for investors who want to encourage this sector. But a clean energy ETF offers a way to spread investment across a number of promising stocks, helping reduce risk to more palatable levels.
HDRO is the first US-issued green hydrogen ETF, with an expense ratio of 0.30%. It’s a new fund run by Defiance ETFs, a registered investment advisor that focuses on thematic investing. HDRO tracks the rules-based BlueStar Global Hydrogen & Next Gen Fuel Cell Index, which tracks the performance of equities and companies that derive 50% or more of their revenue from hydrogen-based energy sources, fuel cell technologies, and industrial gases.
HDRO’s global holdings are all companies involved in green hydrogen, whether in tech, energy production and storage, or infrastructure, and its leading holdings include Plug Power (PLUG), Fuel Cell (FUEL), and Bloom Energy (BE). HDRO has the potential to capture some of the projected growth in the clean energy market, as hydrogen is predicted to generate 24% of our energy needs by 2050.10
1 “Thematic Investing: The Special 1 – Hydrogen primer,” Bank of America Securities, Global Research, 23 September 2020″
2 “Record number of billion-dollar disasters struck U.S. in 2020” NOAA, January 8, 2021. https://www.noaa.gov/stories/record-number-of-billion-dollar-disasters-struck-us-in-2020
3 “New Data Shows Millions of People, Trillions in Property at Risk from Flooding — But Infrastructure Investments Now Can Significantly Lower Flood Risk” World Resource Institute, April 23, 2020. https://www.wri.org/news/2020/04/release-new-data-shows-millions-people-trillions-property-risk-flooding-infrastructure
4 “Climate Change Is Fueling Wildfires Nationwide, New Report Warns” New York Times, November 27, 2018. https://www.nytimes.com/interactive/2018/11/27/climate/wildfire-global-warming.html
5 Global Trends in Renewable Energy Investment 2020. https://wedocs.unep.org/bitstream/handle/20.500.11822/32700/GTR20.pdf?sequence=1&isAllowed=y
6 “Investors plan major move into renewable energy infrastructure” November 23, 2020, The Guardian https://www.theguardian.com/environment/2020/nov/23/investors-plan-major-move-into-renewable-energy-infrastructure
7 “9 Key Elements of Joe Biden’s Plan For a Clean Energy Revolution” https://joebiden.com/9-key-elements-of-joe-bidens-plan-for-a-clean-energy-revolution/
8 “Thematic Investing: The Special 1 – Hydrogen primer,” Bank of America Securities, Global Research, 23 September 2020, p.1.
9 “Thematic Investing: The Special 1 – Hydrogen primer,” Bank of America Securities, Global Research, 23 September 2020, p.1.
10 “Fossil Fuels Still Supply 84 Percent Of World Energy — And Other Eye Openers From BP’s Annual Review,” Robert Rapier, June 20, 2020. https://www.forbes.com/sites/rrapier/2020/06/20/bp-review-new-highs-in-global-energy-consumption-and-carbon-emissions-in-2019/?sh=500e474266a1