Beware of Fads - Personal Experience with Clean Energy

A few years ago I'd been weighing up the pros and cons of jumping into a clean energy ETF. One part of me considered that the world was still essentially married to fossil fuels, and that for such large scale infrastructure projects, the market was a long way off of having truly 'priced in' any benefits from the much promised 'green transition'. In short, a part of me thought I could justifiably wait. The greedier side of me looked for any reason to jump in.

It wasn't like I was the only one - every company around this time was obsessed with green credentials. If you look at annual reports between 2019 and 2022, you'll see a uniformity when we hit 2021 that corporations all got in line on the environmental kool-aid. Not that it's a bad thing, it was just excessive. Then in 2022 war in Europe sent energy prices sky-rocketing and, much like with in 1973 when the Arab-Israeli war had the same effect and led to developments in green/renewable/alternative energy supplies, I assumed this could continue the green-focus trend. I was partially right - the USA's Inflation Reduction Act stimulated investment in green and alternative energy production. I figured this would continue throughout the 2020s in an unstoppable manner.

Alas, it did not. While the iShares Clean Energy ETF gained just over 37% in the 6-7 months following the Ukraine war breaking out, since then it has only really fallen. It's a huge drag on my portfolio, having lost about 40% of its value over the several years since I got greedy and jumped in. I feel more sorry for the saps who invested at the tail-end of 2020 when the clean-energy fad became most noticeable; since then the ETF is down approaching 60%. This was not an example of history repeating, really; the conditions were far different. Clean energy was also indistinguishable from ESG more broadly (understandable, it takes up 1/3rd of the acronym), and ESG was highly politicised and ripe for a backlash which, rightly or wrongly, did end up happening; thus interest in it waned and the cash flows dried up. The final nail in the coffin, confirming the end of the clean energy funds (at least for now) was the hikes in interest rates. Funding new and innovative ways of producing clean energy is only really viable when money is cheap and risks can be taken. The early-mid 2020s is not the environment for that.

And so I hold the fund still, not expecting much from it now other than to keep moving a little lower. The worst of the drop has happened and I'd be nuts to lock-in those losses. My perspective is I'm in too deep! At some point, when/if the economic climate improves and the next round of superfluous spending comes, and when we're all obsessed with green energy again (which will happen), I may be able to get back to the price I bought in at... By the time I seek to liquidate my portfolio, it may have even gained some value (and none of these losses will really matter). Until then, a few lessons on funds:

• Don't rely on history alone to inform your purchases. If something may be hyped, scrutinise the current macroeconomic climate, and political landscape, to figure out if the hype could survive a downturn.
  

• Definitely do not dedicate large portions of your portfolio to essentially a vague notion of 'the future'. Essentially, diversify; upon seeing the direction ICLN/INRG was headed, I had to buy a bunch of boring but surer instruments to mitigate losses.
  

• Scrutinise the companies held by the fund. ICLN/INRG's holdings have been lambasted for quality, and if I had my time again I'd have probably put the money into the giant energy companies that, even though they are drenched in fossil fuels right now, will 100% be the ones implementing the green transition; or at least claiming to. The establishment usually survives.