Darius McDermott: Investing responsibly is very much in vogue

26 March 2020

The world has finally woken up to climate change and there are plenty of opportunities to invest


Decarbonisation is one of the buzzwords of 2020, and the transition toward clean energy and transport is high on the list of priorities.

To stop global warming, banking giant Investec estimates that $2.4 trillion (£1.83 trillion) must be invested every year until 2035. That is a lot of money, but is achievable: global fossil fuel capital expenditure is about $1.6 trillion  (£1.22 trillion) a year. Add this to the $500 billion (£381 billion) spent on renewable energy, and you can see that the money exists – it is just not all going to the right places.

The ‘push’ for change will come from government policy. Prime Minister Boris Johnson, for example, has said he will ban new petrol, diesel and hybrid cars by 2035. The UK is not alone: Germany, the Netherlands and India also plan to ban new sales by 2030.

Zehrid Osmani, co-manager of Legg Mason IF Martin Currie European Unconstrained fund, says: “Transport accounts for around 15% of global greenhouse gas emissions, and we believe the advent of electric vehicles is one of the most exciting growth opportunities in the industrial investment universe.”

Consumers will also play their part

Jason Pidcock, manager of Jupiter Asian Income fund, recently described flying “as the new smoking”. People around the world are starting to shun air travel and, while aviation carbon dioxide emissions today only account for about 2.5% of global emissions*, companies are aware of the threat and are taking action. 

Swedish airports are pioneering the use of biofuels, while Sydney Airport is aiming to source 75% of its power needs from an Australian wind farm. Some airlines, such as easyJet, are offsetting all fuel-related flight emissions. 

The ‘pull’ will come from economic advantages. As David Jane, a fund manager at Premier Miton, says: “As the cost of energy sources, such as solar and wind, continues to fall, and new storage technologies come on stream, it becomes inevitable that suppliers will switch to the cheapest form of energy and this will drive the change.”

Carbon, carbon everywhere

And it is not just about travel. We leave a carbon footprint with almost everything we do. A single cup of tea each day for a year produces the same amount of carbon as a 60-mile car drive, for example. A typical year of incoming emails equates to the same carbon as driving 200 miles in an average car. And you could eat a bowl of porridge every day for four months and produce the same carbon footprint as when you eat a single leg of lamb.**

So there are plenty of opportunities to invest for a decarbonised world. But renewable energy, infrastructure and technology will be key. To get to where we need to be, asset managemernt firm Schroders says that the share of electricity generated by renewables will need to expand from the current 20% to almost 85% by 2050.

The most obvious winners here are the utility companies and energy storage companies, but the entire value chain for how energy is generated, stored, distributed and used will need to be radically transformed – and a huge amount of new infrastructure will be needed.

Having been very much a niche area of investment for the past three decades, funds focusing on sustainability or investing responsibly are now very much in vogue. Two such funds that embrace decarbonisation are Investec and Global Environmental and BMO Responsible Global Equity.

The former has launched very recently and has decarbonisation at the heart of its process. The managers look for companies producing fewer emissions than the status quo, with structural growth, sustainable returns and competitive advantages.

The BMO fund is fossil fuel free, but has a wider remit to invest in companies with sustainable practices and also to invest in, and engage with, companies that need to make positive changes.

You may also be surprised to learn that some asset managers already measure the carbon footprint of their funds: in simple terms, CO2 emissions per £1 invested. The carbon footprint score will obviously depend on the industries in which a fund invests: oil and gas and automotive companies are carbon-heavy, while healthcare and technology will score very highly.

Sustainable funds will also tend to have a lower-than-average score. EdenTree – a pioneer of responsible investing – has been measuring the carbon footprint of all its funds for a number of years. EdenTree Amity UK, its flagship fund, has a carbon footprint 50% below that of the FTSE All Share.

The message is: investors are in a great position to help lead and shape the decarbonisation of our world.   

* Source: First State Investments, 3 February 2020

** Source: How Bad are Bananas? The Carbon Footprint of Everything, Mike Berners-Lee

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views and those of the investment professionals quoted are their own and do not constitute financial advice.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre