Commodities Could Be Superior Sustainability Expression

Owing to growth stocks dramatically falling out of favor and an absence of or paltry allocations to traditional energy equities, environmental, social and governance (ESG) funds are sliding this year.

No matter how one slices it, the widely followed MSCI USA Extended ESG Select Index is in a bear market – down 21.4% year-to-date and 22% removed from its 52-week high. The struggles of that index and others like it underscore several important points.

First, basic ESG funds’ overweights to growth stocks are fine and dandy until growth stocks fall out of favor. Second, ESG ratings/scoring is highly flawed, lacks uniformity and invites political vitriol. Third, and this is a point some market observers raised in recent years, perhaps it’s better to invest for sustainability and environmental virtue via manufacturers and parts suppliers, not based on how many solar panels Apple and Amazon install at their headquarters.

In the world of exchange traded funds, there are plenty of avenues – new and old – for investors to directly access sustainability while eschewing the aforementioned ESG-related controversies. One newer addition to this particular ETF party is the VanEck Green Metals ETF (GMET).

GMET Observations

GMET debuted last November so it’s easily defined as a new ETF and one without a lengthy track record of real time performance. Still, what it has in that department is noteworthy. Rookie status aside, GMET is down 8.72% and that’s significantly less bad than the aforementioned MSCI USA Extended ESG Select Index.

It’s just one example and the timeframe (less than five months) isn’t particularly long, but it underscores the point that there ways to avoid the drawbacks of traditional ESG funds while still emphasizing the “E” and potentially capturing better performance in the process.

GMET, which tracks the MVIS® Global Clean-Tech Metals Index (MVGMETTR), is an equities-based play on commodities producers. While some of the fund’s holdings, including Glencore and FreeportMcMoran, among others, are known for mining gold and copper, they are also producers of green metals.

Green metals aren’t green appearance. Rather, these commodities are used in the production of batteries for electric vehicles, energy storage systems, solar panels, wind turbines and an array of other products necessary to drive adoption of clean technologies.

Additionally, because GMET is an equities-based ETF, investors don’t have to deal with the pesky K-1 tax statement come tax time.

Versatility with GMET

Accessing the green metals theme offers investors flexibility as well as an avenue for tapping into soaring demand.

“Green metals are metals used in the applications, products, and processes that enable the energy transition from fossil fuels to cleaner energy sources and technologies,” according to VanEck research. “Put simply, the demand for green metals is expected to be driven in large part by their role in the energy transition. Metals such as lithium, cobalt, and various rare earth elements are widely discussed metals in this regard, but other metals such as copper, nickel, and platinum group metals have increasingly become intertwined with the clean energy supply chain.”

Due to the fact that many of the metals produced by GMET components don’t have robust underlying commodities markets on par with, say, gold and silver, the ETF and others like it are the best options for investors looking into to get into this space.

“Another way to access this space is through equity investments in the companies that are involved in the extraction, processing, and recycling of these metals. Their share price is influenced by the supply and demand dynamics that also influence metals prices,” concludes VanEck

Related: Apparently, Tesla Isn’t an ESG Stock