Is it possible to invest effectively in renewable energy without the stocks of world’s two largest producers of wind and solar?

Standard & Poor’s apparently wants us to find out after removing NextEra Energy
NEE
, Enel SpA (ENEL, ENLAY) and 13 other mostly utility companies from its self-proclaimed “Global Clean Energy Index.”

NextEra is currently the world’s number one producer of electricity from the wind and sun. And with more than 18 gigawatts of capacity in its near-term development pipeline, it’s set to remain in the top spot for the foreseeable future.

Enel, meanwhile, is on track to operate 145 GW of renewable energy by 2030. The company’s once massive fleet of coal-fired power plants will be completely shut down by 2027. And the utility is in the forefront of green hydrogen development, utilizing electrolysis powered by renewable energy.

Golden Hills Wind farm in Alameda County, California is a 85.9 megawatt wind farm with 48 1.7mw GE … [+] wind turbines developed by Nextera Energy Resources for Google.
getty

Nonetheless, as of this month, investors buying into ETFs and other “green” investment strategies based on this index will no longer have a stake in these two prolific developers and operators of wind, solar and energy storage assets. S&P’s official reason for removal: “An update” to the companies’ “exposure scores” found “a rise” in their “carbon to revenue footprint standard score.”

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Well functioning investment markets are built on differing opinions. And S&P is certainly entitled to have one. But being more than a little familiar with the affected companies, I can’t help but see numerous and substantial flaws in the stated reasoning.

For one thing, Enel and NextEra have been rapidly winding down their fossil fuel generation and ramping up wind and solar for more than a decade. So by definition the long-term trend has been a steep decline in their carbon-to-revenue ratios.

Conversely, one of the companies picked to replace them is Avangrid
AGR
Inc
(AGR). I’ve also tracked this company and its predecessors literally for decades. And I’m definitely a fan of the business plan, which combines regulated energy transmission and distribution utilities with a growing portfolio of onshore wind, solar and most recently offshore wind projects.

But while Avangrid doesn’t currently operate any fossil fuel power plants, it’s on the verge of acquiring PNM
PNM
Resources
(PNM). And that company is still burning coal and plans to continue using gas until at least 2045.

Avangrid also operates natural gas distribution utilities in the Northeast US. And the company is basically the US unit of its 81.52 percent owner Iberdrola SA (IBE, IBDRY), which has plans to continue using fossil fuels until its target date of 2050 for being “carbon neutral.”

Interestingly, Iberdrola is one of the S&P Global Clean Energy Index’ ten largest holdings. That makes sense, considering the company’s aggressive renewable energy project backlog. Still, it’s hard to see how it made the grade when Enel was excluded, since both are European utilities with extremely similar operations and business plans.

Equally incongruous is the fact that the tracking stock for Enel’s South American operations outside Chile–Enel Americas SA (ENIA)–is still in the index. That’s despite that company’s ownership of fossil fuel generation, and being 82.3 percent owned by the apparently disqualified parent.

For all practical purposes, Enel Americas and Enel SpA shares are essentially two ways of owning the same company. But while that’s a plausible reason for excluding one or the other, the same is true for Avangrid and Iberdrola, which are now both included.

The Iberdrola family is a leading global investor in renewable energy. But including both stocks in this index is essentially double counting one company. And every ETF that tracks the Index will be doing the same going forward.

I don’t expect to see any disclaimers from S&P on that score. And it’s also worth pointing out the inclusion of companies in the Index that stretch the definition of renewable energy, including ethanol refiner Green Plains Inc (GPRE) and biodiesel refiner Renewable Energy Group
REGI
(REGI).

More than a few Index holdings have yet to demonstrate any ability whatsoever to generate sustainable earnings, such as cash strapped FuelCell Energy
FCEL
(FCEL). That fact likely explains the Index’ incredible shrinking dividend: It was 4.4 percent in 2017 but is now less than 1 percent.

To be sure, there are still more than a few high quality stocks in this index. And some of them trade at very attractive entry points. But they’re increasingly outnumbered by considerably more speculative fare, including several Chinese companies potentially at risk to global political and trade tensions.

Year to date, the S&P Global Clean Energy Index is down by more than 15 percent and it’s 30 percent below its January 8, 2021 high. That compares to a 22 percent return for the broader S&P 500, and 58 percent for the oil and gas stock S&P 500 Energy Sector Index.

I’m no mind reader. But I’d bet dollars for dimes the stark underperformance of the Global Clean Energy Index explains why S&P is now shuffling the line-up. Enel SpA, for example, is underwater by roughly -15 percent year to date versus Avangrid’s 18 percent plus return.

No one should expect S&P to own up to that. But like almost every large investment company, it almost never takes action until a trend is well in progress, or has pretty much run its course. And the example I’ve laid out here should give every investor cause for pause, whether your objective is high yield, capital growth or some combination of the two.

Mainly, if you use ETFs to invest in big trends, you’ll never have any control over what you own. And you can’t count on a large, faceless, marketing-focused investment company to pick the best stocks for the job.

Bottom line: If you really want to build wealth from a big picture investment theme like renewable energy, there’s no substitute for doing your own research and picking your own stocks. Anything else just won’t make it.

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