Climate considerations are a growing priority for investors
Climate considerations are a growing priority for investors: In 2018, money managers had USD 3 tn in assets invested with climate change and carbon factors in mind, according to the US Forum for Sustainable and Responsible Investment. This is not about surrendering returns for the sake of doing good, but rather identifying companies and sectors developing innovative solutions to climate change and reducing exposure to those that are less likely to do well in a warming world. As governments and companies come under greater public pressure to change their behavior, having a climate change investment strategy is increasingly seen as a smart approach.
For many, alternative energy is the default sector: Renewables are now seen as a highly attractive investment proposition, in part due to policy and framework changes that have simplified the investment process in many countries, but also thanks to large companies like Apple and Google adopting renewable sources to power their operations in the US. Investment in alternative energy could include companies focused on solar, wind, or geothermal production and distribution, or companies that produce the infrastructure for climate-friendly energy production, such as battery cells for electric cars.
But there are many other ways to “climate-proof” your portfolio: Funds focused on the environment are growing in number and scope, and include Templeton Global Climate Change, Aviva Investors Climate Transition European Equity Fund, and DWS Invest Climate Tech fund. Green bond funds are also growing. Companies seeking to transform entire industries — undertaking sustainable building construction, for instance — are now a major source of green investment, but anyone looking to invest might also consider companies undertaking more moderate change, perhaps working to retrofit buildings or supplementing existing power sources with alternative energy.
Meanwhile, technological innovations in the field are ready to boom: Smart mobility — including electric vehicles, commodities for car batteries, and consumer-related services like carpooling — carbon capture and storage, energy efficiency, smart grids, and agritech all have the potential to create massive disruption and transform markets. Vertical farming initiatives such as Crop One use up to 99% less water than traditional agriculture. Food waste management company Winnow uses AI and image recognition to track which items of food are regularly thrown away in restaurants. Precision agriculture, used by companies like Trimble Navigation, employs software installed on farm machines to track weather and soil conditions so that farmers can make the best use of their resources. And in Asia, investments in high-speed rail, like Hong Kong’s MTR, are going full steam ahead.
But beware of the bubble: Investors still need to be mindful of risk, say money managers. Some warn of a repeat of the market crowding and margin pressures seen in the wind and solar energy sectors in 2007, saying that huge growth doesn’t necessarily yield substantial returns. Others caution that any area of investment trying to be cutting-edge is going to necessarily be high-risk. Climate-themed investment funds also have a relatively short history, so their performance can be difficult to assess.
The recommendations? Diversify and do your research. Investment best practice applies in this field, as in any other. Assess how much risk you want to take, the time horizon for your investments, minimum investment requirements and potential tax implications, wealth managers say. And seeking guidance is no bad thing. Success in this kind of investment is all about “understanding the traditional tenets of asset allocation, portfolio construction and having a financial partner, an advisor or wealth manager, who can help you navigate this process,” says one adviser.