Investing to tackle climate change: fund, trust and ETF tips

Where can you invest to help stop climate change? Hannah Smith tells all.

BlackRock chief executive officer Larry Fink signed two letters at the start of the year that signalled a tipping point for sustainable investing. In his annual letters to clients, the head of the world’s largest asset manager said his firm would divest from thermal coal and put sustainability at the heart of its investment decisions.

Indisputably, a lot needs to happen, and quickly, to avert a climate disaster. Global carbon emissions must fall by one-third by 2030 in order to meet the Paris Agreement’s goal of limiting global temperature increases to less than two degrees celsius.

Naturalist Sir David Attenborough warned recently that “the moment of crisis has come” in efforts to tackle the climate emergency. Investors are flexing their muscles to bring about change, with an $11 trillion divestment of fossil fuels under way globally, but there is much more to be done. So where can investors put their money to have a positive impact on the climate?

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Investment fund options

There are some interesting products on the market now which tap into the climate change theme, such as offshore funds Schroder ISF Global Energy Transition and Pictet Clean Energy.

The Schroder fund launched last summer, based on the premise that $120 trillion of investment will be needed to transition the world from fossil fuels to renewables by 2050. The managers select from a universe of just 250 companies which are most exposed to the shift to a low-carbon economy through energy production, distribution, storage and transport. Together, these 250 names would make up just 0.1% of globally listed equities, the managers say, so the fund certainly operates in a niche. Holdings include First Solar, LG Chem and Vestas Wind Systems.

Pictet Clean Energy, meanwhile, backs companies involved in cleaner infrastructure and resources. It features semiconductor firms and electric car-maker Tesla among its top 10 holdings.

Investment trust routes

Investment trusts are a good home for more niche, illiquid stocks, so Impax Environmental Markets (IEM) and JLEN Environmental Assets (JLEN) could appeal to investors interested in the climate change theme.

Wealth manager Tilney’s alternatives fund analyst Louie French says the firm has the Impax fund on its buy list. The London-listed trust invests globally in small and medium-sized companies focusing on cleaner or more efficient delivery of energy, water and waste. Holdings include Norwegian multinational TOMRA, which is involved in recycling and reverse vending, US water technology firm Xylem, and sustainable forestry company Rayonier.

JLEN Environmental Assets is a smaller vehicle but includes a mix of solar, wind, waste and water treatment stocks and anaerobic digestion to generate power.

For an even more focused approach, there’s the Foresight Solar Fund, a trust backing solar power assets in the UK and Australia; the Foresight Solar & Technology VCT; or Bluefield Solar Income. For another type of renewable energy exposure, Greencoat UK Wind is a large investment trust investing in onshore and offshore UK wind farms.

The main caveat with all the above, however, is that they are narrowly focused. That means you could end up with not enough diversification and a lot of risk if they make up too large a part of your portfolio. The other issue is that some of these funds will be investing in fairly new technologies, which means they could be vulnerable to stock-specific risk if companies’ investments in research and development don’t pay off.

A clean energy bubble?

French notes that several very focused environmental funds have launched recently, and are now all chasing the same assets and the same few stocks. Already, valuations are looking stretched in some areas, he warns. “As fund selectors we like to see a track record of delivery, and that does make it tricky with some of these less proven funds. We try to go down a broader thematic rather than a single-theme selection process. That’s partly because of the infancy of the funds but also there’s a big risk that bubbles are being created in the market.”

He suggest investors look at broader sustainable funds that include climate change as one of several themes. Those on his buy list include WHEB Sustainability, which targets small-and medium-sized companies having a positive impact on society and the environment, and Liontrust UK Ethical, a strong-performing UK multi-cap fund with experienced managers. His third pick is the Octopus Renewables Infrastructure trust, which his team backed at its initial public offering in December last year. Octopus is one of Europe’s largest investors in renewable energy with £3 billion of assets, and this portfolio is diversified in the sector across Europe and Australia.

Active or passive?

Liam Fowler, a financial planner at Heron House Financial Management, notes increased demand among clients interested in climate change issues. The firm uses a mix of active and passive funds. He warns, however, that too much emphasis on one theme can lead portfolios to become “geographically distorted”, as many clean energy stocks will be listed in the US and UK. The group’s own positive impact portfolios do include clean energy investment opportunities, but these sit alongside healthcare, infrastructure, and other responsible investment ideas to improve diversification and spread risk.

For Fowler, active management is the best way to get exposure, primarily because it can help investors avoid greenwashing. “When you start going into more specialist areas, active investment fund managers really come into their own because the level of research needed is a lot more advanced,” he says.

Climate-focused ETFs and Passives

UK investors are not yet spoilt for choice when it comes to clean and renewable energy exchange-traded funds (ETFs) or index trackers. “There has been a big push on ESG more broadly, but specific climate-related funds are still somewhat light on the ground here in the UK,” comments Ben Seager-Scott, head of multi-asset funds at Tilney Group.

“Really the only established ETF is the iShares Global Clean Energy UCITS ETF,” he says. “The challenge is a common one across thematic funds, though – there is a big difference between identifying a key theme and making a solid investment return out of it. For the latter, a thorough understanding of valuation and profitability is also key, and not always straightforward.”

He points also to the opportunity cost of being an early adopter: the actively managed Pictet Clean Energy and the passive iShares funds have both underperformed the MSCI World Index over five years, for example. “Clearly, identifying renewables as a theme earlier wasn’t necessarily beneficial to investors,” he notes. That said, most recent performance has been good, relatively speaking: the iShares fund has outperformed active rivals over six months and one year (see table). It costs 0.65%, which is pricey for a passive fund.

Choice in the market may improve in future as more groups launch funds, and more specialist products could come over from across the pond: in the US, the Invesco Solar ETF and the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index ETF are among those competing for investors’ attention.

Climate-themed investment returns

Note: *Octopus Renewables Infrastructure Trust listed on the main market in December 2019. Source: FE, as at 21 Feb 2020.

Climate-related hazards on the rise

- The number of floods and heavy rain has quadrupled since 1980 and doubled since 2004
- Atmospheric carbon dioxide has increased 46% since the Industrial Revolution
- 10 million more people in coastal areas are vulnerable to rising sea levels
- Extreme temperatures, droughts and wildres have more than doubled in the last 40 years
- The global temperature has risen 0.9ºc since the 19th century
- A 1.5.°C temperature rise would see 70% of coral reefs die. At 2°C, over 99% will be lost
- The rate of Antarctic ice loss has tripled in the last decade
- There is a 95% probability that climate change is the result of human activitySources: UN Intergovernmental Panel on Climate Change, Met Office, NASA, CDIAC, Global Carbon Project, Carbon Brief.