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Fighting climate change: the funds and companies with positive solutions
Global markets and investors have been held captive by the Covid-19 pandemic in recent months, and rightly so. But as the global conversation gradually moves on from saving lives to savings jobs and shoring up economies, climate change remains the elephant in the room.
In April the UK economy shrank by 20.4%, an unwanted record decline that shows the severity of the current challenge to our economy, jobs, savings and wider wellbeing. Yet global warming also remains a real threat and one that must not be airbrushed over.
Left to continue its current trajectory, global warming will shift weather patterns, threaten food production, cause rising sea levels, create more droughts and heat waves, strengthen hurricanes, and endanger the very survival of humanity.
The United Nations has already called climate change ‘a matter of life and death’, while David Attenborough has said it could lead to the collapse of civilisations and the extinction of much of the natural world.
FIVE CLIMATE CHANGE SHIFTS
Reforming food and forestry
Changes to what we eat, how it’s farmed, and how much we waste could address 20% of today’s greenhouse-gas emissions, while halting deforestation could address 15% of CO₂ emissions
Electrifying our lives
Electrifying the road-transportation sector and the buildings in which we live and work would help eliminate 42% of today’s yearly CO₂ emissions
Adapting industrial operations
Electrifying a broad range of industries, as part of a collection of operational adaptations, could address 33% of today’s annual carbon emissions
Decarbonising power and fuel
Scaling renewables to decarbonise the power system would allow downstream users of electricity – everything from factories to fleets of electric vehicles – to live up to their own decarbonisation potential and address the 80% of global energy demand accounted for by fossil fuels
Ramping up carbon-capture and carbon-sequestration activity
Deep decarbonisation would require major initiatives to either capture carbon from the point at which it is generated (such as ammonia-production facilities or thermal power plants) or remove CO₂ from the atmosphere itself
MAKING A SMALL DIFFERENCE
We can all make small differences in our own ways; widespread recycling, avoiding single-use plastics, turning off unnecessary lights around the house, perhaps eventually trading the petrol/diesel car for an electric one.
We can also invest in businesses and funds that are helping humanity avoid catastrophe, and not at the cost of wealth creation.
It used to be a common misconception that investors putting money in this space had to sacrifice returns, yet this is increasingly being proved wrong.
Jon Forster, one of the managers of Impax Environmental Markets (IEM), an investment trust that has been focusing on the green theme for nearly two decades, argues that companies and industries providing solutions to global warming and climate change will grow faster than other mainstream markets.
This view was backed up by a BNP Paribas report in 2019. It highlighted empirical data suggesting that strong performance on ESG (environmental, social and governance) measures improved corporate financial performance and investment returns, and more evidence continues to come through.
For example, analysis last year showed that the MSCI KLD 400 Social index, focusing on 400 US firms which score highly in ESG terms, had generated annualised returns of 9.8% over the last 25 years. That was versus 9.6% for a wider universe of US stocks.
PERFORMANCE COME RAIN OR SHINE
The better performance by ESG stocks was repeated during the early stages of Covid-19, with first quarter 2020 declines for the best ESG stocks in the MSCI ACWI Global Equity index of 15.6%, versus a 22.1% fall for the poorest ESG rated, according to research by Alliance Bernstein.
Q1 2020 RETURNS BY ESG RATING
ESG Leaders are companies with strong environmental, social and governance practices.
In global equities, ESG Leaders outperformed companies with poor ESG ratings by almost 7 percentage points.
The difference was even bigger in US equities, where ESG Leaders saw returns 11 percentage points higher than ESG Laggards.
Source: Alliance Berstein
As emerging markets investment specialist Mark Mobius, who runs the Mobius Investment Trust (MMIT), says: ‘By taking ESG factors into account, investors can significantly reduce the risk profile of their investments, which over the long term not only translates into positive risk-adjusted returns, but also positively impacts all stakeholders.’
HOW TO INVEST
There are two main approaches to creating a climate change investment strategy. One is investing in alternative energy and the other is to back climate problem solvers.
The International Energy Agency (IEA) forecasts strong growth for renewable energy over the coming years to cover roughly 40% of global energy consumption growth over the next five years thanks to investment in wind, wave and solar projects, particularly in India and China. By 2050, the IEA believes renewable energy will produce between 70% and 85% of the world’s electricity.
But there are more exciting areas away from power generation. Energy efficiency is one of Impax’s major investment themes, identifying areas like the heat pump technology developed by engineer Spirax-Sarco (SPX) and industrial automation.
Other investment areas to target might include smart mobility, smart grids, carbon capture and storage, and batteries that power electric vehicles.
A decade ago, there were just three battery-powered electric vehicle models on the market in the US, two in the EU and none in China, say analysts at Schroders.
The best-selling battery-powered electric vehicle in 2008 was the TH!NK City, clocking up sales of about 330 units, according to the asset manager. Made by little-known Norwegian firm Think Global, the manufacturer filed for bankruptcy in 2011 and soon after was acquired and production ceased.
Fast forward to 2020 and there is 53 battery-powered electric vehicle models on the market in the US, 70 in Europe and 226 in China.
The price of a lithium-ion battery pack has fallen by 85% over the last 10 years and, as batteries are the largest input costs for electric vehicles, this has allowed today’s product offerings to have a truly mass-market appeal. Tesla’s Model 3 was the best-selling electric vehicle last year, with more than 300,000 units sold. ‘This is no longer a niche industry,’ says Schroders.
The other way to invest is what some call climate-proofing a portfolio. The premise is that a warmer Earth will create economic disruption and that companies need to be prepared.
Retailers with gigantic buildings can have a large carbon footprint due to the vast numbers of energy sapping stores and food waste. But Walmart, for example, has worked to make its stores more environmentally responsible, from demanding that suppliers use less packaging to turning off lights at night. These are small steps that, given the retailer’s size, have saved it billions of dollars and reduced waste. The company is also installing solar panels on stores.
The UK’s Tesco (TSCO) is doing similar, building the UK’s first 100% carbon ‘positive’ store, which recycles rainwater, utilises low power light emitting diode (LED) lights and is powered by solar panels. Tesco wants to be totally carbon-neutral by 2050.
In another example, Toyota, the maker of the popular hybrid Prius vehicle, has sold bonds whose proceeds were used to promote its hybrid technology.
New rules on corporate transparency mean companies must now demonstrate they are being run responsibly and have adopted policies to address environmental issues, making it less tricky for investors to see who is doing what, where and when.
One place to find out if a company is operating in an environmentally friendly way is to look at the report and accounts, but don’t expect information to be black and white.
For example, you might think that Royal Dutch Shell (RDSB), one of the world’s biggest oil and fossil fuel extractors, is the very antithesis of an environmentally friendly company. But the issue is more nuanced than it appears at first sight.
Shell is investing in a network of charging stations for electric cars and lorries, and researching various sustainable fuel alternatives, such as using bacteria to convert light to energy.
GETTING EXPERT HELP
This is a hugely complex issue, and some companies are not very good at communicating their environmental practices, while others may not have a policy at all. That’s why it can pay to use the services of a fund manager when seeking to make investments explicitly linked to good environmental practices.
For example, fund manager Pictet runs a rigorous process under a seven-category umbrella that means only 400 companies qualify for investment consideration for the €3bn Pictet Global Environmental Opportunities Fund (B4YWL06). About 50 of those stocks are held in the portfolio, including data centres operator Equinix and Thermo Fisher Scientific, which makes science-based equipment designed to make the world healthier, cleaner and safer.
Similarly, asset manager Liontrust has a three-stage approach to constructing its sustainable portfolios. It screens for companies which it considers are negatively impacting the environment (such as miners, airlines and oil companies). It looks for companies providing solutions to environmental issues, and then actively prompts investee companies to embrace strategies that will mean a greener future and result in better investment returns.
‘The Earth has warmed by roughly 1.1ºC since the late 1800s and 2020 is on course to be the hottest since record keeping began,’ says BNP Paribas.
Five years ago, 195 countries signed the Paris Agreement, committing to maintain this century’s rise of temperature at less than two degrees Celsius above pre-industrial levels.
This represents the biggest agreement ever signed on an environmental issue, and the 2018 Conference of the Parties (COP 24) has finalised a rule book to implement the Paris Agreement.
‘With time running out to mould a smooth transition, the chances of a faster change, with unavoidably disruptive impacts on financial markets, are rising,’ believes Schroders.
That could be great for investors looking to invest in companies and funds capable of meeting the challenge. As such, here are five funds to consider buying now.
Five climate funds to buy now
Impax Environmental (IEM) 311p
Why buy now?
Impax couldn’t be better placed with climate change being one of the investment trust’s core investment themes, alongside cutting air pollution, reducing and treating waste, and eradicating single-use plastics.
The investment trust typically focuses on profitable companies providing new technology or other solutions to these substantial problems, such as sustainable packaging supplier DS Smith (SMDS), heating technology firm Spirax-Sarco and PTC, the US energy efficiency specialist.
As one of the first funds to offer retail investors the chance to benefit from growth in the ‘green’ theme, it has been investing for nearly two decades and the portfolio has a truly global spread, currently split between the US, Europe and everywhere else roughly 40%, 40% and 20% respectively.
How has it performed?
Its share price has doubled over the past five years. Net assets have grown 73% over the same period, and while that has only tracked the wider FTSE Environmental Technology index, it substantially outstrips the mainstream MSCI ACWI benchmark’s 59.7%.
Jupiter Ecology Fund (BJJQ4J8) 462.58p
Why buy now?
You might consider this to be the grandfather of environmental funds. The Jupiter-run ecology fund was the UK’s first authorised green unit trust and recently celebrated its 80th anniversary.
Run by manager Charlie Thomas for 17 years, the £516m portfolio mainly looks to achieve long-term capital growth but it also provides investors with a small bit of income too with 0.9% historic yield.
With a global remit and a fundamental bottom-up stock picking approach, the fund makes long-term investments in leading companies that provide tangible solutions to global environmental challenges, including wind turbine manufacturer Vestas, recycling processor Veolia and electronics giant Schneider Electric.
How has it performed?
While the fund hasn’t matched the returns of mainstream markets during the bull run, putting up a 40.6% return over five years versus the wider Investment Association’s (IA) Global index’s 52.7%, that trend reversed in 2019 (27.2% against 21.9% respectively).
If experts are right about robust future performance of climate-friendly businesses, that performance reversal may prove sustainable.
WHEB Sustainability Fund (BHBFFN0) 223.74p
Why buy now?
Another fund looking for solutions to the long-run issues thrown up by climate change and associated complication is WHEB Sustainability Fund (BHBFFN0), run by Ted Franks and Ty Lee.
It concentrates on environmental issues but also wider social challenges, such as sustainable transport, clean energy, health and education. That makes it a good example of a climate change specialist that is also exposed to wider ESG themes.
The fund typically backs medium-sized companies in sectors such as resource efficiency, greener transport and water management. About two thirds of the £411m worth of assets are invested in the US, with the rest in spread around Europe, the UK including testing group Intertek (ITRK), Japan and elsewhere around the Asia-Pacific rim.
How has it performed?
The fund returned 21% during 2019, according to Trustnet data, and has roughly matched or bettered global stock markets in each of the past five years. It has achieved 9.1% annualised returns over the past five years.
Pictet Water (B3B1T83) 330.86p
Why buy now?
Five-star rated by Trustnet, this €5.59bn fund is a specialist within the climate change/ESG funds range, focusing on the water and air sectors.
Run by a five-strong team of co-managers, Pictet Water (B3B1T83) invests in companies providing water supply, water technology or environmental services. This is an actively managed portfolio built using a combination of industry and company analysis to select businesses it believes offer secular growth prospects at a reasonable price.
Globally spread, the fund scores companies on multiple metrics, including franchise strength, ESG focus and management quality, before filtering on valuation and prospects for a mixture of defensive and faster growth companies.
How has it performed?
Impressively, beating the wider IA Global benchmark in four out of the last five years (2018 was the black sheep), and returning 75.8% since 2015 compared with 52.7% of the IA index.
iShares Global Water ETF (IH2O) £34.11
Why buy now?
As an index matching ETF, this is one of the cheaper options for investors playing the climate change theme with a 0.65% total expense ratio. As the name suggests, this is a great way to gain exposure to a core green theme and one of the world’s megatrends as water becomes increasingly scarce in many regions.
The water theme may not dazzle investors with the same sort of exciting new technologies of other climate change investments, but it may appeal to investors with a lower risk appetite who want to get on board with megatrends.
Companies being tracked by the ETF include large cap water and waste companies like Pennon, Severn Trent and United Utilities (UU.), plus American Water and Essential Utilities in the US. You also get exposure to industrial companies including health, safety and environment kit supplier Halma (HLMA).
How has it performed?
It delivered double-digit returns in 2016 (28.1%), 2017 (15.7%) and 2019 (29.4%), according to Morningstar, and an impressive 11.7% annualised return over the past 10 years.