Interactive Investor

ii ACE 40 iShares Global Clean Energy ETF under formal review

The ETF is low-cost option in the specialist category of our ACE 40 list of rated ethical investments.

24th March 2021 10:50

Myron Jobson from interactive investor

The ETF is low-cost option in the specialist category of our ACE 40 list of rated ethical investments.

interactive investor, the UK’s second-largest direct-to-consumer investment platform, has placed its ACE 40 rated ethical fund iShares Global Clean Energy ETF (LSE:INRG) under formal review in the wake of proposed changes to its methodology.

The ETF, which currently features as a Low-Cost option within the Specialist category on ii’s ACE 40 list of rated ethical investments, seeks to track the performance of the S&P Global Clean Energy Index composed of 30 of the largest global companies involved in the clean energy sector.

This month, S&P Dow Jones Indices unveiled proposals to increase the number of holdings of its clean energy index from 30 to 100 following a consultation with the market, in a move designed to reduce constituent concentration, address liquidity risk and improve index replication.

The formal review is in line with our ACE 40 methodology, which is monitored continuously for ‘yellow card’ events. Examples of such events include, but are not limited to, change in investment methodology, fund manager moves, and a major re-rating from external or internal sources. 

Dzmitry Lipski, Head of Fund Research, interactive investor, says: “Following the US presidential election and subsequent change in UK Climate Change Policy, clean energy stocks have attracted significant inflows and their performance and valuations have been pushed to extreme levels. Given the concentrated nature of the S&P Global Clean Energy Index and the mid-small cap focus, the huge inflows heightened the liquidity risks of the underlying 30 stocks.

“So, while these proposals look sensible, given the proposed changes to the index methodology, we will review how this change will impact the underlying portfolio exposure and whether it will continue to be the best option for investors in the clean energy sector.”

Proposed changes to index methodology from April 19, 2021:

  • introduction of an additional 0.75 exposure score level (Significant clean energy exposure) in addition to current scores: 0= Eliminated, no exposure, 0.5 = Moderate clean energy exposure, 1 = Maximum clean energy exposure.
  • While currently only companies with a score of 1 were eligible for inclusion, new rules allow if not enough stocks with a score of 1 can be selected to make up the target of 100, the remaining number is made up of companies with scores of 0.75, which are ranked by market cap. If at this point the target constituent target has not been reached, the largest-cap stocks with a score 0.5 are selected until either; the 100 target is reached, all companies with scores of 0.5 and above have been exhausted, or the index’s weighted average score falls below 0.85.
  • The single constituent weight caps by exposure score: constituents with an exposure score of 1 are capped at 8%, with 0.75 - at 6% and with 0.5 - at 4%. Furthermore, all stocks with a weight greater than 4.5% cannot collectively make up more than 40% of the index.

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