Q&A: Sustainable investment

14 December 2009

Climate change is now firmly centre stage. But what it means for investors, and how to profit from it is far less clear. Following the Copenhagen Summit, attention is focused on the environmental technology industry but will this deliver the promised next industrial revolution? Or are politicians at home and abroad staking their future on bold promises that can’t be delivered?

Moneywise recently held a live webchat with Bozena Jankowska, manager of Allianz RCM Global EcoTrends fund, and Mark Hoskin, a chartered accountant at Holden Partners.

Q: I have heard some commentators say funds that I would consider to be green are, in fact, unethical. Can you define exactly what you mean by sustainable investing?

Mark Hoskin (MH): There are a lot of buzzwords in this sector and they mean different things to different people. You hear people talking about sustainable investing, green investing, and ethical investing. More recently ethical investing has come to incorporate all of these things.

For example, The Sustainable Investment And Finance Association (UKSIF) runs an ethical investment week in November but includes all funds under the umbrella of sustainable investing. These can run from very light touch with no ethical screens – meaning they don't exclude companies based on negative criteria - through to funds like the Allianz RCM Global EcoTrends Fund, which invests in green technology, all the way to the F&C stewardship income, which probably excludes armaments, animal testing, alcohol and human rights among other criteria, but doesn't necessarily have any particular environmental focus.

Q: What will the Copenhagen Summit mean for my environmentally-friendly investments?

Bozena Jankowska (BJ): In the lead up to Copenhagen Summit (7 – 18 December), there were a succession of meetings to try and put together a framework to work from in finalising a successor to Kyoto.

There have been a lot of concerns around the lack of action or consensus between developed and developing countries. And so the concern was that there would be no outcome from Copenhagen. However, [in the weeks before the Summit] both the US and China publicly announced for the first time their intentions to reduce carbon emissions. So the expectations became more upbeat as a result of that.

So what does this mean for environmental technology funds? There’s a bigger consensus on climate change, with targets sets, and a growing need for low fossil fuel energy.

Also there’s the ‘low hanging fruit’ – that is, measures to advance the growing energy efficiency in buildings and lighting, as well as industrial processes. Examples include building insulation, and LED lighting.

MH: It is incredibly important because environmental technology relies on government support, in terms of feed-in tariffs, carbon credits etc.

And if Copenhagen increases government support for these kind of incentives, then long term it will have a positive impact on your investments. It is also important as part of a process to change people's attitudes towards climate change because society needs to culturally change to enable politicians to put these incentives through parliament in the confidence that they will be re-elected.

Q: Environmental technology sounds like a contradiction in terms – please can you explain what this means?

BJ: I would define environmental technology as technologies of the future. It can provide products or services, which offer solutions to environmental problems and challenges that have happened in the past and which we are trying to avoid. Examples range from environmental technologies to water needs, reducing air pollution and land pollution, and moving towards lower carbon energy forms.

Some of these problems can be resolved by cutting back on industrial activity but clearly that is not realistic as we continue to grow. We need to learn to use resources more efficiently and that can, to a great degree, be done by environmental technologies.

So technology of the future that will help us address these problems would include things such as: solar power; technologies that help to provide clean drinking water in the developed and developing world; and help to reduce emissions from coal-fired power plants.

Q: Are investors best to invest indirectly via companies involved in this area, or directly via the actual commodities themselves?

MH: I think it depends on your attitude towards risk, and also your approach to investing in climate change. We would typically use investment funds to get exposure to this area, but we have in the past invested directly in commodity exchange traded funds to make a play on what we would call ‘climate change commodities’.

However, within a portfolio these have very different risk characteristics, and may or may not be appropriate for different individuals.

Clients will also have a different view on what is a green commodity. For example, natural gas is much cleaner fossil fuel than coal or oil, and has been very important in reducing carbon emissions to date.

You might also like to invest in plutonium or uranium but you have to be pro-nuclear – despite being very carbon friendly, many ethical investors don't like it.

Q: Is there a way to get investor exposure to carbon trading schemes?

MH: There are a number of ways to get exposure to the carbon market. But I would point out that none of these have been particularly successful recently because the carbon price has come down from about 20 euros a tonne to 13 euros a tonne, and its hasn’t recovered.

Therefore, it may be a good time, depending on Copenhagen, to back these type of investments.

You can get exposure in the AIM market through a company called Trading Emissions Plc. It invests in projects in the developing world and retains carbon credits for sale on the open market. Alternatively, ETF Securities has an exchanged traded fund called ETFS Carbon, which would give you exposure to this market.

I would qualify this by saying that this is a high-risk area to be involved in but could form part of a portfolio.
Q: Are there any must-have green technologies we will have to have in every home in the future that I could look to invest in? I was considering something like smart meter manufacturers.

BJ: Smart grids are something we're going to see deployed over the coming years not only in the UK but also in Europe, the US and emerging markets like China. Smart grids are a way of enabling utility companies to better anticipate energy needs and manage those more effectively. This is particularly important when we're having more alternative energy being plugged into the grid – such as wind farms.

There are a number of companies that provide a range of smart grid solutions, from smart meter themselves to ultra high voltage lines that are more efficient at transporting energy.

Other technologies that are a few years down the road include fuel cells. These are cells for the home, which will enable users to generate their own electricity and heat in and around the home. In effect it is like having a mini power station in the house.

Q:  Investing in sustainability often just seems like another call to invest in energy firms. How can investors target the smaller lesser known companies or sectors instead of just putting more cash into massive gas, oil or energy firms?

MH: The best way of investing is through funds, as these will invest in companies that most UK investors will not have heard of, and certainly doesn’t include BP, Shell, Exxon Mobile - or any other blue chip stock that you will have seen in nearly all private portfolios 20 years ago.

Q:  Would you recommend environmental technology for child trust funds? What’s the long-term future for environmental technology?

MH: I think this would be an excellent thing for a CTF to be in because you are taking a very long-term view. However, I don't know of one environmental fund that is available through a CTF.

Q:  Developing economies such as Brazil, Russia, India and China are likely to see infrastructural spending help to combat climate change. Which other countries should investors also be looking at, in terms of green spending opportunities?

MH:  Yes it is true that developing economies have announced large stimulus packages that include large amount of money being spent on infrastructure. In fact, I recently returned from an extensive tour of China where I had the opportunity to visit 15 companies which directly stand to benefit from this spending – including smart metering companies, fast rail infrastructure, wind turbine manufacturers, waste to energy generators and nuclear equipment manufacturers.

The trip highlighted to me the strong commitment that the Chinese government has towards deploying green technologies while it is looking to build its infrastructure and grow its economy.

In terms of other countries, stimulus packages have also been announced by the US, and Europe including the UK, all of which have dedicated a percentage of the stimulus funding towards the deployment of green technologies to address issues such as climate change and energy efficiency.

The best way to tap into this global stimulus spend is to invest in, for example, a portfolio which is global and invests across a broad range of environmental technologies.
Q: Does climate change provide the element of ‘fear’ necessary in the market to get this sector performing?

MH: I think most of the world still doesn’t recognise climate change. And until the sea levels rise by a metre, no one is really going to take it seriously enough.

All targets are set 20 to 50 years out, which allows politicians to reset priorities in the short term. Ultimately, though, fear will drive this sector - there's just not enough of it at the moment.

BJ: It’s not just climate change that drives deployment of alternative energy - although it is a very important driver. Other factors, such as energy diversification and security, are other catalysts for alternative energy.

By energy security, I mean becoming less dependent on foreign energy sources. For example, most of the UK's gas comes from Russia, and many sources of oil are now found in increasingly politically unstable regions of the world.

Q: If you could invest in one ‘unethical’ investment what would it be and why?

MH: If you take the view that climate change is going to happen and sea levels will rise by two to three metres, then I would be investing in armament firms and security firms. This is because climate change will engender, at its worst, huge migrations of refugees searching for food, water and a place to live - which will inevitably lead to increasing conflict.

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