Watch out, there’s a green bandwagon trundling along and it’s coming your way. A couple of years ago, you would have been hard pressed to find an investment that specifically invested in renewable energy or, out with the small range of ethical funds, one that considered the impacts of climate change; but that is rapidly changing as investment houses get caught up in the rush to capture the green pound.
This might come as a surprise to those early adopters invested in Merrill Lynch New Energy Technology Trust or the ill-fated Friends Provident Eco-Tech Fund (killed off within a few months of launch in 2001) but within the last 12 months we have seen five new ‘Climate Change’ funds launched and there are another three to come by the end of the month.
So what’s caused this sudden rush to the market? Well it would appear that following the Stern Report, Al Gores “An Inconvenient Truth”, and lots of wet summers, the City is finally waking up to the fact that there might just be a thing called climate change………..and that there’s money to be made. Make no bones about it, these aren’t ‘ethical’ funds and their purpose is born out of nothing more that a detailed study of the bottom line. Over the past 36 months many ethical funds have been outperforming their mainstream counterparts, due in part to their focus on smaller companies, many of which were active in renewable energy or climate change linked technologies. Whilst the mainstream funds were busy loading up with oil and mining and tobacco, the ethical funds have for a long time held investments in sustainable industries of the future. The net result being that when the penny dropped alternative energy started to come into greater demand so their stock price rose.
The new funds fall into two distinct camps, there are the genuine technology funds such as Allianz Global Ecotrends, Neptune Green Planet and the soon to be launched Impax Environmental Leaders, and then the broader ‘Climate Change’ funds such as HSBC Global Climate Change Fund, F&C Global Climate Opportunities, The Schroders Global Climate Change Fund and the new Virgin Climate Change Fund. So ubiquitous is the term becoming that you might start to believe that Climate Change is rapidly becoming an asset class in itself.
The increase in choice and welcome additional direction of funding to climate related technologies is of course welcome, but I think that a degree of caution is required by both ethical and mainstream investor alike. For the ethical investor, the key issue to be aware of is that these funds are not screened along normal ethical criteria - you might well find that nuclear power is deemed to be a ‘clean energy technology’, unguarded investment in China will be common and that the fuel cell company that you are investing in has key clients amongst the defence industry. In fairness, this is not new, the few funds that have existed to date such as Merrill Lynch and Impax have always focused on the technology first but as the companies they invest in are often smaller, there has been less of a conflict for the ethical investor.
The ‘tech’ funds are specialist energy and technology funds and will experience all the volatility that can be associated with this sector. These technologies can take a long time to come to market and there is always the risk of new technologies superseding them. Until now there has been a limit of capital in the market for these businesses, often for good reasons due to the inherently risky nature and poor business climate for many of the projects. The risk now is that with a sudden influx of money, that quality control is not rigorous enough and investments are made in companies which do not offer real shareholder value. Therefore, critical to investment decisions is a strong technical and research knowledge in the investment team - a characteristic which is ably demonstrated by the Impax team and seems to have been followed by Allianz.
The more general Climate Care funds should certainly come with a health warning. At best they are a thematic investment with a neat ‘green’ banner and at worst they seem to be vaguely disguised global investment fund with a green cloak and a small technology/climate solution sash. These funds are unashamedly mainstream; Neil Bridge of Schroders commenting that the fund “is not for tree huggers” and Virgin Money stating that “Many ‘green’ funds fail to give decent returns because they put politics before performance”, which is interesting when you consider that the Virgin UK all-share tracker has unperformed the FT-SE itself and been outshone by the L&G Ethical Tracker by 20% over the past five years*.
When you look beneath the green cloak, what you find with these funds is what we in the ethical sector would recognise as either a ‘best of sector’ or a ‘Thematic’ fund. These type of funds have been available in the ethical market for six or seven years now, with funds like
The core theme for most of these funds is ‘okay, we have climate change – how can we make money form it? It’s not clear is much long term consideration of effects such as ‘peak oil’ are undertaken or whether the funds remain relatively short term in focus. The focus of most funds will be to seek opportunity to profit from businesses active in either combating the effects of or finding sustainable solutions to the effect of global climate change, be it investment in carbon offset, emissions credit trading, clean water technologies, catalytic converters or leading edge technologies. It is quite likely that investment will focus on emerging economies such as
The growth of the markets understanding of the effects of climate change is to be applauded and as an adviser, I will certainly welcome choice in the field, especially in providing greater retail access to enviro-tech companies. However, I watch with interest the development of this new breed of fund and will be interested to see just where the money ends up, how they perform and what difference the investments will make.
*source: Financial Express 05/02/03 – 05/02/08 Bid to Offer, income reinvested.