It’s been real tough holding the line on responsible investment over recent months. As tech stocks have tanked on global sharemarkets, energy stocks have soared as the noose tightens around Russian and Ukrainian oil and gas supplies.

The S&P/ASX Energy (AS51ENGY) Index rose 28.4% in the 12 months to 30 May 2022, compared to 1.3% for the All Ordinaries (AS30) over the same period. That’s not to say the All Ords is aligned with responsible investment, merely that it illustrates how energy stocks have soared relative to everything else on Australia’s major exchange.

I took a quick look at a few Australian ethical/sustainable/responsible exchange traded funds offered by Blackrock, Van Eck and Russell. They had all flatlined around their value of a year ago so, in fairness, sticking to your principles has not resulted in capital losses, just sacrificed potential gains. By sheer coincidence, they have more or less emulated the All Ords index.

One ASX-listed ETF laser-focused on investing in companies it believes well-positioned to capitalise from ‘climate change innovation’ is Betashares ERTH. Its price has lurched 17% below its price of a year ago.

Because of its exposure to global stocks, comparisons with those ETFs invested solely in Australian companies is largely irrelevant. Nonetheless, it is one of the few ETFs that is invested with conviction in resources and technologies intended to mitigate climate change - the polar opposite to carbon intensive fossil fuel exploitation.

It’s a typical ‘thematic’ investment portfolio, in which you invest if you are convinced by its architect’s and promoter’s vision of how it aligns to where the world’s economy and demands are heading. Other big thematics include biotechnology, emerging food supply and manufacturing (think vegie-based protein) and just straight-up technology plays.

The risk here largely lies in whether you are right - not in whether there’s a product that aligns with your world view. The investment marketers will always have a product to match your whim with their profits.

What the Ukraine crisis underscores is that thematic investments with portfolio concentration in specific sectors are the most volatile when unexpected geopolitical, pandemic or economic shocks hit. Volatility has a fantastic habit of creating winners from sinners and losers from choosers.

If you’ve taken the moral high ground on investing in fossil-free portfolios, it is hard to watch the ‘sinners’ share the spoils over the past twelve months.

The current energy supply crisis highlights two things:

1. The world’s transition from fossil fuel dependency is going to take many years; but

2. Greater investment in renewables has the greatest potential to reduce the sovereign risk associated with disruption to energy supply chains.

In the meantime, the crystal ball for investments remains cloudy. Will good ultimately prevail over evil and how strong can you be in avoiding a flutter on the dark side?

Photo by Siavash Ghanbari on Unsplash