A guide to investing in clean energy ETFs

The transition to a low-carbon economy is underway – and is rewiring the economy and transforming entire sectors. From expanding the capacity of renewable energy and having more electric vehicles on the road, to transforming high-emitting sectors and ensuring sufficient supply of materials critical to all of these activities, the transition will involve a massive reallocation of resources, and inevitably will have significant implications on markets and portfolios.^*  As a fiduciary, BlackRock is prepared to help our clients mitigate risks and capture opportunities associated with the low carbon transition. BlackRock continues to build new transition products globally, while expanding and deepening our research on the impact of the transition on the economy and market pricing. In this article, we highlight the clean energy investment opportunity associated with the low-carbon transition.

• Advances in key technologies and supportive policies have driven significant cost declines and the early adoption of clean energy.
• Massive recent public sector investment programs in the U.S., Europe, China, Japan and beyond could accelerate adoption further, bringing clean energy to the mainstream.
• Continued innovations in solar, wind, as well as newer technologies like hydrogen, could further drive growth.
• iShares Global Clean Energy Index ETF (XCLN) offers clean energy exposure across the full value chain, including power generation and technology across several renewable sources.

Clean energy is coming of age as a core component of today’s global power infrastructure and may be positioned to become the primary energy source of the future. This could have significant implications for investors.

Wind and solar adoption accelerated clean power’s penetration of the global electricity mix. Renewable energy sources now generate 29% of all global electricity, up from the 17-19% share held from 1985-2009¹. Advances made in solar and wind technologies, and supportive policies, made this possible. More efficient and reliable solar panels and wind turbines, on top of financial support from the public sector, has dramatically lowered the cost of clean power to well below that of fossil fuels². This is incentivizing rapid adoption and economies of scale that have driven further cost declines³. Looking forward, the International Energy Agency (IEA) projects that global renewable electricity capacity could increase more than 60% by 2026, representing 95% of all new power capacity.⁴

Countries around the world are transitioning to clean energy sources for reliable, affordable and clean power. Amid 2022’s energy supply shock, governments enacted new legislation to rapidly expand clean energy infrastructure. As a result, by 2030, annual investment could reach $2 trillion, 50% more than today.⁵

In the U.S., the Inflation Reduction Act, marking the most significant action Congress has ever taken on clean energy and climate change,⁶ has the potential to be a gamechanger for both supply and demand. It includes approximately $370 billion in clean energy-related spending to strengthen domestic energy security and reduce emissions, investing in wind and solar power production, manufacturing across the clean energy value chain, and clean energy-enabling technologies related to electrification and energy efficiency.

We think clean energy producers and technology manufacturers could benefit, as tax credits, investments and direct purchases may help boost revenues and improve margins. By 2030, thanks in large part to the Inflation Reduction Act, the IEA expects annual solar and wind capacity additions in the United States to nearly triple.⁷

It is also worth noting that 2021’s Infrastructure Investment and Jobs Act (IIJA) included support for clean energy, investing tens of billions in clean sources and enabling technologies that could improve viability and extend clean energy’s reach beyond the power sector to unelectrified end-uses across transportation, buildings, and industry.⁸

Outside of the U.S., global efforts are ramping up significantly:

• Europe: In 2022, the EU made plans to adopt the €210 billion REPowerEU initiative.^9,10 The initiative increases the EU’s 2030 target for clean energy generation to 45% and would grow clean energy capacity by an additional 15%.¹¹ The program joins the EU’s Global Gateway program as a major part of the bloc’s plan to accelerate energy transition. The Global Gateway seeks to invest €300 billion to support sustainable development around the world.¹² Building upon and complementing these initiatives, the EU recently published the Green Deal Industrial Plan (GDIP), which aims to provide a more supportive environment for the scaling up technologies and products required to meet Europe's climate targets.¹³
• China: In March 2022, China released its 14th Five-Year Plan (14FYP), which seeks to grow clean energy output by 50% by 2025, primarily through wind and solar.¹⁴ The plan represents a major stride in outlining how the country will meet its 2030 emissions target and 2060 carbon neutrality goals.
• Japan: Japan enacted its Green Transformation Program in 2022, which will invest $126 billion to meet decarbonization goals, with a significant share of those dollars going to alternative energy sources, technologies and infrastructure.¹⁵

By 2026, some estimate that global renewable-electric capacity could rise more than 80% from 2020 levels, with two-thirds coming from wind and solar.¹⁶

Wind Power

The world has come a long way since the advent of the windmill. Onshore wind farms contain hundreds, sometimes thousands, of individual turbines which stand ~310 feet tall and boast long blades that give them 410-foot diameters.¹⁷ Just one of them can power 940 American homes.¹⁸ Turbines are becoming more and more efficient as advances in technology and engineering improve their design and lower costs.

Advanced materials, and new engineering techniques, are making turbines bigger still; the largest in development are over 850 feet tall with 800-foot diameters.^19,20 Other technologies, like embedded sensors and artificial intelligence, are providing additional benefits, adjusting turbine positioning in real-time to optimally capture the wind.

Solar Power

Solar power is fast growing. In the U.S., solar accounted for 45% of new electricity-generating capacity added in the first three quarters of 2022.²¹ From 2016-2020, solar power capacity increased 98GW annually on average, compared to 32GW across the six preceding years. In 2021, solar’s share of global clean energy generation reached 13%.²²

Efforts are underway to develop multijunction photovoltaic (PV) cells, or cells made with multiple semiconducting materials, which would have higher maximum efficiency thresholds than today’s silicon cells. Other materials, like perovskite and quantum dots, are showing significant success in laboratory settings. These materials could both improve solar PV efficiency and bring clean energy to new settings, including within paint and window glass.

Hydrogen

Hydrogen (H₂) is the most abundant element in the universe but the new kid on the block in clean power. It contains 3x more energy content by weight than gasoline and burns without emissions. Electrolyzers can produce H₂ with just two inputs – water (H₂0) and electricity. When that electricity is generated from clean energy sources, such as wind and solar, electrolyzers produce “green hydrogen” – one such type of hydrogen, which can be used in fuel cells or burned as a clean energy source. Some estimates show the green hydrogen value chain reaching $11 trillion by 2050.²³ Clean energy sources can only go as far as the electric grid, and 80% of today’s global energy consumption comes from off-grid end uses (e.g., gas in cars, oil and coal in industrial production). Green hydrogen represents a clean energy source for these end uses when electrification is not an option.

Investors seeking to capture this theme may want to consider ETFs that offer exposure not to any one clean energy source, such as solar or wind, but the full range of producer types and the many enablers of these technologies, including:

• Companies involved in the generation and distribution of clean energy from wind, solar, and geothermal sources, as well as producers of hydrogen and bioenergy
• Companies involved in manufacturing technologies and components used to generate and distribute clean energy, including, but not limited to:
  • Wind: Wind turbines and the components that comprise them, including wind blades, nacelles, driveshafts, gearboxes, sensors, and generators
  • Solar: Solar modules, silicon and other solar cells, solar glass, inverters, charge controllers, batteries, racks, and materials related to each
  • Hydrogen: Fuel cells, electrolyzers, fueling stations

We expect continued innovation and resulting improvements in clean energy economics to meaningfully accelerate clean energy’s penetration of the global power and energy mixes. Supportive policies and investment should secure such a shift, serve as a boon for clean energy companies and bring about new potential growth opportunities.

iShares Global Clean Energy Index ETF (XCLN) allows investors to capture the growth of clean energy sector by investing holistically across the full value chain. The ETF invests in global companies involved in clean energy opportunities with target themes including: ethanol & fuel alcohol, geothermal energy, solar energy, biomass & bio-fuel, hydro-electricity, photovoltaic cells, fuel cells and wind energy. The ETF also applies business involvement screens and excludes companies with elevated carbon intensity.