Changing climate shifts ethical investors

Climate change funds, once dismissed as “gimmicky”, have been quietly out-
performing the market, according to a new report.

They have been helped by their exposure to energy stocks and defensive utility companies as governments increase spending on alternative energy and infrastructure to combat climate change.

Holden & Partners, the ethical financial advisers, published data this week showing that climate change funds have outperformed the MSCI world index over two and three years, with some – such as Schroders Global Climate Change and F&C Climate Opportunities – outperforming over one year as well.

Over these periods, ethical investment strategies have undergone a subtle shift. Whereas the focus used to be on “screening” stocks to filter out those that invest in sectors such as tobacco or armaments, “positive” screening for companies that are combatting climate change has come to the fore.

Most specialist climate change funds do not describe themselves as ethical – though they are likely to appeal to ethical investors. Managers of these funds say that there is a strong investment case for climate change technologies.

“There has been a strong development of the climate change sector despite the [financial] crisis, which has been a positive – in Asia, there have been subsidies and initiatives we haven’t seen before,” says Bruce Jenkyn-Jones, investment director at Impax Asset Management, the environmental specialist.

He says valuations on renewable energy stocks, which had fallen as the sector found it hard to get funding, are looking very attractive. Energy efficiency stocks – such as insulating for buildings – have done well this year as projects have been able to get off the ground again.

Climate change funds therefore outperformed conventional ethical “screening” funds, many of which had large holdings in bank stocks, which harmed their performance in 2008.

Ethical funds also tend to have a UK bias, while climate change funds take a more international approach. This has allowed them to benefit from the weakness of sterling, as well as to diversify into markets such as China, which is competing with the US to be a major producer of solar and wind energy.

Some climate change funds struggle with volatility, however. Energy stocks are correlated to the oil price, while the paucity of bank funding has meant that many wind and solar projects have been put on hold.

Nicola Donnelly, a fund manager at WHEB Asset Management, says one way to cope with volatility is to broaden beyond energy stocks to other climate change themes, such as water access and demographics.

She is investing in Eaga Insulation, a UK company that advises low-
income households on insulating their homes.

In fact, several climate change funds play a range of different themes, such as healthcare and agriculture. Schroders’ fund, the best performing climate change fund in the past year, has a large holding in Tesco.

However, retail investors have yet to catch on to climate change. In spite of its strong performance in the past year, the Schroder Climate Change fund has less than £21m in assets under management.

“The retail investor is not getting this and I think they’re going to miss out,” warns Mark Hoskin at Holden & Partners, who says much of the interest is coming from institutions.

One reason could be that climate change funds pay little income – an average
of 1 per cent a year. But, this could be set to change, with the introduction of a multi-asset climate change fund from Cheviot Asset Management. It’s the first of its kind and is expected to pay a yield of 3 per cent.