Hydrogen ETF

Sometimes called the “Swiss army knife” of decarbonisation, hydrogen is versatile, and can remove carbon dioxide from a lot of industries – like steelmaking, ammonia production, shipping – that are heavily polluting.

Hydrogen is not new. But today more than 95% of it comes from fossil fuels like methane and coal. What is new – and potentially exciting – is the growth of green hydrogen, which is created by using clean energy to split water into hydrogen and oxygen. Green hydrogen promises a quiet energy revolution, as it can replace hydrogen generated from fossil fuels. Furthermore, it can then be extended into other areas of the economy where solar power and batteries are unworkable. (For a list of use cases for green hydrogen, please see our Investment Case document).

Turning hydrogen green, and then using it to decarbonise industry, is sometimes called the “hydrogen economy”.

Hydrogen businesses are identified by Solactive, which runs the index, using a two-step process. The process is used both to identify hydrogen companies, but also to distinguish between pure-play and non-pure play companies.

The first step is natural language processing (NLP)—which is a form of keyword search. The second step is using FactSet’s sector classification system, called RBICS.

In the first step, Solactive uses NLP to trawl through companies public filing documents, websites, social media and other literature to identify hydrogen businesses. In the second step, hydrogen companies identified by the NLP are next examined under the FactSet Revere Business Industry Classification System (RBICS). Those in RBICS sub industries: Fuel Cell Equipment, Technology Providers, Thermal and Chemical Processing Machinery Makers are identified as “pure-plays”. Those outside these sectors are non-pure plays.

HGEN uses a capped and tiered index methodology. The tiering involves splitting companies into pure-play and non-pure play companies. Pure play companies are allowed to take up to 10% of the fund each, while non-pure plays are allowed only 4%.

The capping involves, at each semi-annual rebalance, selling companies whose weights have expanded over the 10% and 4% thresholds described above.

This weighting methodology is to ensure that pure play businesses have an expanded influence on the performance of the fund. While the capping is used to ensure that no single company becomes too influential.

As the vast majority of hydrogen today is produced from fossil fuels, the index uses an ESG screen that severely restricts the ability of fossil fuel companies to enter the index.

The ESG screen removes any company making over 5% of its gross revenue from oil or gas production. And removes any company that makes over 10% of its revenue from producing coal. Similarly strict revenue thresholds greatly limit the ability of weapons companies to enter the index. While tobacco, and gambling companies are outrightly removed.

The ESG screen also excludes companies with verified ongoing failures to respect established international norms, as codified under the UN Global Compact and the OECD Guidelines for Multinational Enterprises.

The index provider, Frankfurt-based Solactive AG, uses ESG data sourced from Minerva Analytics, an ESG research and data company based in the UK. Minerva conducts proprietary research on companies’ sustainability and governance activities to build data sets. Minerva’s datasets are used by Solactive to determine the final constituents in the index.

The strength of this data-driven approach to ESG is that it can be incorporated into an index, allowing for potentially lower-cost passive management. Limitations of this approach include a lack of direct stewardship and potential for data errors.

1. To express long-term strategic or short-term tactical views on decarbonisation and the energy transition.

2. To diversify a portfolio away from fossil fuel companies, which are present in some investors portfolios.

3. To access an earlier stage and potentially higher growth clean energy investment opportunity.

We design our ETFs with a view of minimising the amount of overlap between each. In this way, investors who buy more than one of our funds avoid buying the same stocks repeatedly.

The precise amount of overlap between each fund can differ as the stocks moving in and out of each ETF change at index rebalance/reconstitution. Whatever overlap exists is usually small. For investors wanting to know the exact quantify of overlap between specific ETFs, please feel free to contact us.