Indexology^® Blog

Clean energy has certainly been a prominent topic in 2023, especially among those at the front and center of discussions at the United Nations Climate Change Conference (COP28) in Dubai, which just concluded. As we are approaching the end of 2023, we wanted to review the results of the S&P Global Clean Energy Index Series rebalance from October and share some of the key developments from the second half of the year in the clean energy space.

October Rebalance

Launched in 2007, the S&P Global Clean Energy Index has been a benchmark to measure clean energy-related companies’ performance over the past 16 years. In April 2021, we also launched the S&P Global Clean Energy Select Index, which is designed to measure the 30 largest companies in global clean energy businesses that are listed on developed market exchanges.

Both the S&P Global Clean Energy Index and the S&P Global Clean Energy Select Index went through a semiannual rebalance on Oct. 20, 2023. In the index methodology, we assign companies to four buckets of exposure scores from 0 to 1 with an increment of 0.25 to measure their purity of exposure to the clean energy business. Exhibit 1 shows the change in exposure before and after the October rebalance. We can see that for the S&P Global Clean Energy Index, post rebalancing, we have 10 more companies with an exposure score of 1 being added to the index. The weighted average exposure score of the index improved from 0.92 to 0.95. This shows the effect of rebalancing to improve the purity of index exposure to clean energy companies. The S&P Global Clean Energy Select Index, on the other hand, selects 30 companies with an exposure score of 1 listed in the developed market exchanges.

On the market allocation breakdown, the major change of the S&P Global Clean Energy Index post rebalancing is the 3.11% weight increase in India and 2.72% weight increase in China, together with a 5.01% weight decrease in Spain. For the S&P Global Clean Energy Select Index, the weight of the U.S. increased by 11.86%, with a drop of 6.19% in New Zealand and a drop of 5.41% in Brazil.

S&P Global Clean Energy Index Performance YTD in 2023

After outperforming the S&P Global BMI in 2022, both the S&P Global Clean Energy Index and the S&P Global Clean Energy Select Index underperformed YTD through the end of November 2023. The S&P Global Clean Energy Select Index was down 21.49% and the S&P Global Clean Energy Index was down 27.88% in USD total return terms. There was significant dispersion seen among constituents; some of the performance laggers included Sunpower Corp (-76.98%), SolarEdge Technologies (-71.98%) and Plug Power (-67.34%), while Chubu Electric Power (up 38.24%), VERBUND AG (up 16.54%) and First Solar (up 5.33%) made up for some of the loss with positive performance contributions.

Despite the performance headwind, we continue to see encouraging discussions around the world on the energy transition, including the following selected highlights.

Key Developments

The International Energy Agency (IEA) Released the World Energy Outlook 2023

In October, the IEA released the World Energy Outlook 2023, in which it says that the use of fossil fuels is not declining quickly enough, but the move to renewable energy is “unstoppable”.¹ According to the report, “Tripling renewable energy capacity, doubling the pace of energy efficiency improvements to 4% per year, ramping up electrification and slashing methane emissions from fossil fuel operations together provide more than 80% of the emissions reductions needed by 2030 to put the energy sector on a pathway to limit warming to 1.5 °C.”²

Global Pledge on Renewables and Energy Efficiency

At COP28, the Global Pledge on Renewables and Energy Efficiency was signed by 121 countries.³ Among other objectives, those who sign the pledge commit to “work together to triple the world’s installed renewable energy generation capacity to at least 11,000 GW by 2030, taking into consideration different starting points and national circumstances.”⁴

COP 28 Concluded with a Deal to Transition away from All Fossil Fuels

After many nights of discussion, almost 200 countries reached a deal to transition away from all fossil fuels. This first-ever agreement once again enforces the global commitment to net zero emissions by 2050. Although the deal is not legally binding, the message is loud and clear. It is now on each country to set up its own agenda in order to phase out fossil fuels “in a just, orderly and equitable manner.”⁵

¹ https://www.bbc.com/news/science-environment-67198206

² IEA (2023), World Energy Outlook 2023, IEA, Paris. https://www.iea.org/reports/world-energy-outlook-2023

³ https://energy.ec.europa.eu/news/cop28-eu-energy-days-focus-implementing-clean-energy-transition-after-launch-global-pledge-2023-12-04_en

⁴ https://energy.ec.europa.eu/system/files/2023-12/Global_Renewables_and_Energy_Efficiency_Pledge.pdf

⁵ https://www.wsj.com/business/energy-oil/cop28-leaders-call-for-transitioning-away-from-fossil-fuels-in-final-push-at-climate-talks-48f4b1c3

“…sometimes I’ve believed as many as six impossible things before breakfast.”
– The White Queen, Through the Looking Glass

Should an asset owner rely on historical performance data to select managers? The efficacy of doing so depends on the answers to three questions:

• What fraction of the manager universe is truly gifted?
• How gifted are they?
• How lucky might the “ordinary” managers be?

For example: Suppose we assume that 60% of all managers are “gifted” and 40% are “ordinary,” that a gifted manager has a 75% probability of achieving above-median results, and that an ordinary manager has a 12.5% chance of doing the same. Exhibit 1 shows some implications of these assumptions for a 1000-manager universe.

Exhibit 1 contains both good and bad news for our hypothetical asset owner. The good news is that after one period, 90% (450/500) of the above-median managers are genuinely gifted; if our assumptions are correct, hiring only from the above-median pool will lift the odds of success. The bad news is that our assumptions are almost certainly incorrect, not to say wildly unrealistic. Why? Because these assumptions imply that 69% (344/500) of period 1’s above-median managers will also be above median in period 2—a persistence rate far greater than those we actually observe. Exhibit 1 is, sadly, an artifact of wishful thinking.

If Exhibit 1’s assumptions are clearly wrong, what alternatives might be more realistic? To be more modest, we can reduce the population of gifted managers from 60% to one-third, reduce their probability of ranking above median from 75% to 60%, and narrow the gap between the gifted and the ordinary by setting the ordinary managers’ chance of being above median at 45%. As before, Exhibit 2 contains both good and bad news for our hypothetical asset owner.

The good news is that using Exhibit 2’s assumptions, 51% (255/500) of period 1’s above-median managers should repeat that performance in period 2. Although we don’t often see results that good, 51% persistence is not unheard of, and so Exhibit 2 is at least a somewhat plausible model of reality.

The bad news in Exhibit 2 is that only 40% (200/500) of period 1’s above-median managers are genuinely gifted; 60% of them got there through luck rather than skill. And perhaps worse news: only 47% (120/255) of the managers who are above median in two consecutive periods are genuinely gifted. In other words, an asset owner who hires from the above-median pool is more likely to get an ordinary manager than a gifted one. Even if we assume that genuinely gifted managers exist—and that they stay gifted over time—hiring an above-median performer provides a less-than-even chance of finding the gifted manager we are seeking.

Active management is difficult, as readers of our SPIVA Scorecards know well; identifying outstanding managers is perhaps equally challenging. Relying on historical performance rankings is unlikely to be helpful.

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