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The hot topic

Climate change funds were the words on everybody’s lips in 2007 but global financial events have somewhat overshadowed the buzz around them.

However, green issues could be the hot topic again as US president Barack Obama sets out his commitment to tackling climate change.

Climate change funds generally aim to seek out investment opportunities in companies that are mitigating the impact of climate change.

This includes investment in waste management, renewable energy, water and environmental technology.

In 2007, Virgin Money, HSBC, Schroders, F&C and Jupiter all launched climate change funds.

F&C’s global climate opportunities fund run by Sophie Horsfall invests in alternative energy, energy efficiency, forestry and agriculture, water and acclimatisation among other things.

The fund has posted a return of -39 per cent against a benchmark of -34 per cent over one year to November 30, 2008. The fund had €31.17m in assets under management in December.

Horsfall puts the rise in popularity of these funds down to three main factors – Government legislation, changes in corporate behaviour and consumer demand.

She says: “It is connected with a lot of legislation and regulation coming through both globally and from governments. Obama has also been talking a lot about wanting to create ‘green collar’ jobs so it has government and political support.

“Added to that, corporate and consumer behaviour has also come into line. Corporates are green-washing their behaviour and trying to win consumers over their side.

Schroders global climate change fund co-manager Simon Webber agrees and says it is going to be a long-term investment theme.

He says: “There is a steadily building investment awareness in the fact that climate change is a very big issue and it is only going to get better over time. Governments will push us in the direction of a low- carbon economy.”

Webber says, despite the economic downturn, the fund has seen small net positive inflows and he believes this will continue.

The fund stood at £12.7m in November 2008 and since its launch in September 2007 it has seen a return of -26 per cent compared a benchmark of -25 per cent.

With president Obama proposing to double alternative energy production in the next three years and the UN Conference on Climate Change at the end of 2009, Webber says the outlook is very favourable for investment in green companies.

He does not think the economic downturn is dampening interest in climate change issues – on the contrary, he believes the two issues go hand in hand.

Webber comments: “These issues will build again in people’s awareness. They need to see that the recession is not harming politicians’ commitment to tackle climate change. If anything, it is doing more because many of these companies will benefit from the fiscal stimulus that Governments are putting in place.”

Impax was one of the companies to see the potential in this market fairly early on. It launched its environmental markets fund in 2002. Over five years, the fund has posted a return of 34 per cent against a benchmark of 18 per cent. Total fund size was £268.7m at the end of November 2008.

Impax CEO Ian Simm says institutional investors in particular have woken up to the fact that there are some pretty healthy returns to be made by investing in environmental companies.

He says: “Markets are large and growing rapidly. They are also pretty inefficient so companies with the right strategy can do well. We have also seen demand from certain types of retail investor – socially responsible ones and general investors who are looking for the next trend.”

But there has been some criticism levelled at climate change funds.

Brigid Benson, managing director of ethical IFA The Gaeia Partnership, thinks many climate change funds are diluted as they often invest in big companies that have an environmental research wing – even if the company itself is not engaged in reducing the impact of climate change.

She says: “It is about whether a company is fully engaged with wanting to reduce its energy outputs internally and externally and I do not think the climate change funds are necessarily investing in those companies at all. There is a disconnect with what they say the fund will do and what they actually do. It is just blowing in the wind.”

However, F&C’s Horsfall refutes this and says they will only invest in companies that have a small carbon footprint and that are actively seeking to mitigate the impact of climate change.

Hargreaves Lansdown investment manager Ben Yearsley says he thinks these funds are slightly gimmicky but, whether investors believe in climate change or not, the long-term commitments from governments does mean there is money to be made.

Yearsley favours the Impax and Pictet funds and says he would probably avoid the Virgin fund due to poor performance.

But he thinks the credit crunch has dampened investors’ appetite for such funds. He says: “Funnily enough, people are less worried about the environment in the economic climate. It was the hot topic for a while but now it has gone a bit cold.”

Seven Investment Management marketing director Justin Urquhart Stewart agrees that, at the moment, these funds will struggle.

He says: “People have now become so risk-averse and whether it is green or not has become secondary. Money wins over morals. This is quite an expensive niche.”

But niche is exactly what the New Earth Solutions recycling fund is after. The fund invests directly in the company New Earth Solutions which is opening recycling and composting plants in the UK to help reduce the amount of waste going to landfill sites.

The company is backed by local authority contracts and Impax has also invested in the company New Earth Solutions. The fund had raised around £7.25m at the end of November 2008.

Finance director Adrian Jones says he intends the fund to remain a niche and says it is more likely to attract high-net-worth investors and institutional investors. He believes that advisers would probably look for a more broadly based environmental fund for their clients.

Although the fund was only launched in July last year, Jones says it has seen steady growth and considers that one of the strengths of the company is that it is underpinned by local authority contracts.

He adds: “There is also an understanding of what we do. Composting is relatively straightforward and it is simply on a bigger scale to what many people do in their back garden. During the tech boom, there was little understanding of what people were investing in but composting is easier for people to relate to.”

Simon Webber, co-manager, Schroders global climate change fund

There are opportunities in both the short term and long term. There will be some very important moments and catalysts this year.

In the short term, the credit markets are affecting renewable energy but in the medium to long term it is very exciting. We are interested in energy efficiency, insulation, smart electricity meters and water.

We do not think that very expensive technologies are getting a lot of attention. Solar companies for example are still too expensive.

We take a sector-specific approach. We decided against BP and Shell because the amount of capital they spend on renewables is tiny. All we are looking for are the companies that are positively affected by the trends on climate change.

Sophie Horsfall, fund manager, F&C global climate opportunities fund

We are nervous about alternative energy technologies in the short term. In the long term, it will do well due to the legislation coming in, as well as a desire to be less reliant on the Middle East for oil. But they need to grow fairly fast and can they get the funding? The short answer is no, not at the moment so we do have concerns over their funding in the short term. But when credit markets improve, the outlook will be better for the sector.

As far as we are concerned, water is blue gold and will be one of the greatest commodities in the future so we like investing in efficient use of water and transportation of water. We see Roper Industries in the US and Manila Water as good investments. Acclimatisation, such as crop management, is another area where we see potential.

Climate change funds differ from ethical funds. Investment in GM foods would be unacceptable for an ethical fund but would be acceptable for climate change funds.

We split out how we look at companies. We have a team that is separate to the fund managers who specialise in climate change and they have to approve any company for our acceptable list. It is not the fund manager’s decision as to whether it is acceptable or not.

Adrian Jones, finance director, New Earth Solutions

A fundamental change is needed on how with deal with waste and how we make energy. The market for waste disposal is going to get huge. There will be increasing demands on big supermarkets and energy companies from consumers to be greener.

Tesco and Sainsburys are recognising that their sustainable strategy is inherent to attracting and maintaining customers.

People like our funds for a number of factors. It is recession-proof and everyone can see what they are dealing with. Waste streams are not affected by economic downturns. It has had a marginal impact.

The energy we can extract from waste is a very valuable commodity. It is an energy source that operates 24/7. We will be moving into this area in the future.

There is also a huge demand for waste disposal in developing countries like China and India who are only at the start of their development. There is going to be a time when we start mining landfills. These resources are going to be very precious in 50 to 100 years.

Ian Simm, CEO, Impax

We see ourselves as a mainstream asset area. You do not need to have an ethical view before you take a position in it. We emphasise that you can make money out of this and we do not really emphasise the ethical point.

There will be a shakeout of the funds in these areas. The funds that are properly run will continue to thrive. I can see this space continuing to outperform.

I do not like the term climate change funds. It suggests that they are dependent on Government legislation. We prefer to call them environmental markets and infrastructure funds.

There are a lot of concerns about air pollution, energy sources running out and lack of clean water and these are outside the global warming issue.


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