Taking the fight to climate change

David Prosser looks at investment companies with a positive environmental impact.

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It is the greatest threat of our time – but also the greatest opportunity. Green industries, encompassing businesses involved in both climate change mitigation and adaptation could be worth $10.3 trillion a year to the global economy within the next 25 years according to recent research from the think tank Oxford Economics. That represents a compelling long-term investment theme for everyone – and a rare chance to do well by doing good when allocating your savings.

“Green industries, encompassing businesses involved in both climate change mitigation and adaptation could be worth $10.3 trillion a year to the global economy within the next 25 years.”

David Prosser


However, given the amorphous and wide-ranging nature of the efforts to confront climate change, it can be difficult for investors to know where to start. All the more so in areas where new tools and technologies are only just emerging – most of us lack the expertise to make an informed judgement about the merits of, say, competing battery solutions, or the commercial viability of tidal power installations.

Happily, the investment companies sector offers two different ways to secure exposure to climate change-related assets while benefitting from professional management and portfolio diversification. A growing number of funds provide a way into this theme.

First, consider the Environmental sector, where there are three well-established investment companies – Impax Environmental Markets, Jupiter Green Investment Trust and Menhaden Resources Efficiency. These funds all operate to individual mandates, but broadly offer exposure to businesses directly involved in delivering energy and water more cleanly and efficiently. In other words, they seek out businesses that will be direct beneficiaries of the need to marshal the world’s precious resources more carefully.

The second climate change play available via investment companies is more specific. There are around 25 funds that invest in renewable energy assets (including a handful of tax-efficient venture capital trusts that focus on small, early-stage businesses). They hold businesses in parts of the energy industry that have become mainstream, including wind and solar energy production, as well as in more niche areas that are just beginning to gain traction.

In both cases, individual funds will inevitably see volatility to a greater or lesser extent, either because of portfolio-specific factors or macro shifts. Renewable energy funds, for example, have struggled in recent months because rising interest rates undermine the value of future earnings in an industry where a good chunk of the return comes from long-term contracts for supply.

Nevertheless, it is difficult to argue with the long-term merits of these funds. The context in which they are investing could hardly be more supportive, even if there are ups and downs along the way.

It’s also worth pointing out that investment companies are particularly well suited to investing in these assets. Environmental funds often invest in smaller companies that can be illiquid; it is difficult to trade in and out of their shares without moving the price of the stock. Renewable energy funds are also exposed to illiquidity, since they’re investing in large-scale and long-term infrastructure assets. In both cases, the closed-ended structure of investment companies provides protection; investors aren’t exposed to this illiquidity because they can buy or sell the fund’s shares at any time on the stock market.

None of which is to say that now is the time to jump into these funds. However, for investors looking for long-term holdings where there is a structural case for outperformance, the climate change opportunity must be close to the top of the list.