The Copenhagen summit put climate change firmly at the top of the news and political agenda. But what opportunities are there for investors?
The myriad of discussions surrounding carbon emission targets make it easy to forget, along with the very real challenges facing the world, climate change also throws up a raft of investment opportunities.
Those fund managers who had the foresight to recognise the opportunities early on have been well rewarded. Over the past five years, the FTSE ET50, which follows the 50 largest environmental technology companies, has risen by 68%.
Few now doubt the very real threat climate change will have on the global economy, nor the financial rewards for those companies that develop the technologies that help us to become less dependent on carbon.
Mark Hoskin, managing partner at Holden & Partners, says: “For an investment adviser to ignore the threats and benefits climate change will bring is equivalent to burying their head firmly in a large pile of sand.”
There is good reason to invest in companies developing environmental technologies. Even though the discussions at Copenhagen were disappointing, governments around the world are putting very real legislation in place to curb carbon emissions.
Terry Coles, co-manager of the F&C global climate change opportunities fund, says: “Government policy towards climate change has become much more favourable over the last year or so.”
Consumers are now much more aware of climate change and are driving a move towards more environmentally friendly products.
The global financial crisis is still causing considerable uncertainty about the outlook for the global economy but technology to combat climate change is one of the few growth areas.
As climate change has become more mainstream, so too has the number of investment managers offering funds investing in this sector. And it is becoming easier for retail as well as institutional investors to invest.
So how does a retail investor go about investing in climate change technology?
It is good to start out with some definitions. There are a plethora of terms floating around, including cleantech, greentech and envirotech.
Stop a man in the street and ask him which kind of companies will benefit from climate change and it is likely he would point to producers of alternative energy such as wind turbine or solar panel manufacturers.
But the type of companies tackling climate change are much broader than that definition. As well as those trying to come up with alternative sources of energy there are those that have developed ways to make existing technologies more efficient. And there are other areas outside of energy like dealing with diminishing water supplies, cleaning up pollution and dealing with waste more effectively.
Hoskin says: “It’s important not to be focused just on those high-profile companies like wind turbine manufacturers. A lot of value can be found in those companies that focus on making boring industrial processes interesting.”
For example, the Ludgate Environmental fund has just invested in a new company called New Earth Solutions.
The government is encouraging councils to recycle more waste and use landfill less by aggressively increasing landfill tax over the next few years. New Earth Solutions helps councils to address this problem by taking the waste from the councils at much lower price than it costs them to put into landfill sites.
“New Earth Solutions reckon around 99% of waste is either recyclable or compostable. So they either recycle the waste or use an accelerated composting process to turn the rest of it into materials that can be used by farmers,” says Hoskin.
It is difficult, however, for someone without detailed knowledge to be able to pick the right companies.
Philippe De Weck, senior investment manager at Pictet Asset Management, says: “In this sector in particular, it is very risky to pick companies without in depth knowledge. Many of the companies have new business models and it is hard to predict which ones will work and which will fail.”
Diversification is important for any investment portfolio but it is even more vital for sectors where a number of companies may fail.
David Harris, manager of the responsible investment unit at FTSE Group, says: “Investing in passive fund strategy like an ETF that tracks one of the FTSE environmental indices is a cheap and easy way for retail investors to get diversified exposure to this sector.”
But De Weck says that retail investors need to be wary of just putting money into a passive strategy. “In this sector a fund manager can add real value. Bubbles can occur in subsegments of this sector and it is important to know when take profits and wait for a more opportune time to re-invest.”
Another of the very real problems facing investors who want to put money into these types of companies is that the sector remains small.
“The challenge for making investments in this sector is that many of the companies that derive the majority of their profits from climate change technology are often quite small and that major funds that focus only on these companies can start to distort the market,” says Harris.
Impax Asset Management was one of the first UK fund managers to invest in global environmental technologies. So when FTSE decided to draw up its first environmental index, it based it on Impax’s index of the 50 largest environmental technology companies.
To broaden the universe, FTSE recently developed a series of environmental opportunity index series that had less stringent criteria. “For example, companies needed to derive 20% rather than 50% of their profits from environmental technology.”
It is going to become increasingly easy for retail investors to put money into these different types of investment strategies. “There will soon be many products available for investors in this area,” says Harris.
Among the gloom that surrounded the lack of consensus over the Copenhagen summit and the continuing uncertainty over the outlook for the global economy, the potential returns to be made out of climate change technologies represents one very real bright spot on the horizon.
