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They think it’s oil over

The case for environmental investment is growing stronger as the strain increases on non-renew-able resources.

Two surveys publishedlast week highlightedthe point that some important resourcesare running out.

The first survey is the biennial Assetwatch survey from Clerical Medicalwhich tips commoditiesin general, and platinumin particular, as the best-performing asset classfor 2008.

This would continue on from 2007 when commodities were the best-performing asset class, returning 20.6 per cent and HBOS chief economist MartinEllis puts this down toa mismatch betweensupply and demand.

In the case of platinum, extraction is not keeping pace with demand for usein jewellery or in catalytic converters for cars.

In the case of agricultural commodities, the high price of soyabeans is being caused by the switching of large amounts of production in the US and other big food- producing countries away from food productionto crops for biofuels.

HBOS chief economist Martin Ellis: “Soyabeanswere the strongest-performing commodity as farmerscut back production togrow more corn forthe biofuel industry.”

Last year, Schroders setup a global climate change fund to invest in the increasing demand fornew technologies.

Speaking at the fund launch, managing director UK retail Robin Stoakleysaid: “We believe there are excellent returns availableby investing in companies which will benefit from efforts to mitigate and adapt to climate change. Dealing with climate change is likely to bethe biggest global investment theme ofthe next 20 years plus.”

The other survey published last week was the authoritative Barclays Equity Gilt study 2008.

The study points out that if India and China were to raise their levels of oil consumption to those ofthe US, then oil would run out in less than 25 years.

Hargreaves Lansdown head of socially responsible investing Alex Davies says dwindling stocks of oilare one of the drivers of environmental investing, pointing out: “Therewould be no need to develop alternative energy at all if it wasn’t forthe shortage of oil.”

Mark Hoskin, a partnerat Holden Partners, saysthe tipping point will come before then. “If demand rises to such a level, thenthe price of oil will increase to such a point that usingoil would no longer be sustainable.”

Earlier this month,IFA Holden & Partners produced a guide toclimate change investingto highlight the growing number of opportunities in environmental investing.

The guide found there isa lot of difference between the different investment styles of funds that label themselves as socially responsible or ethical. Many have very limited exposureto companies directly tackling climate change.

Hoskin says some fundsdo not really qualify as environmental funds because of the very low exposure to pure environmental stocks.

The Holden & Partners’ report says some funds hold stocks such as oil companies and car manufacturers. Hoskin says even if they are accepted as climate change funds, the nature of their investments means their performance is not goingto be much differentthan many other UKequity funds.

In contrast, pure environmental funds, such as Impax Environmental Markets Trust, Merrill Lynch New Energy Technology and Triodos Renewable Energy funds, offer more interesting prospects.

Hoskin says: “I think the growth story could be enormous. No one appre-ciated what IT could do for the world but now it is involved in everything. You could run a paperless office if you wanted. In a sense that could happen with environmental technologies.”

Davies agrees that many climate change funds are growth-orientated. He says: “They are very biased towards technology and traditionally technologyhas been a growth area.”

Even without the huge potential for future growth, the performance of the environmental companiesis impressive. The FTSE ET 50, an index of the top 50 environmental companies – those which make more than 50 per cent of their revenues from alternative energy, water purification or waste treatment – has comfortably outperformed the FTSE All World index over the last three years.

Hoskin injects a note of caution. With so many smaller and newly established companies in the environmental sector, investors in this area could be subject to higher levelsof volatility.

“It is definitely more volatile,” says Hoskin.”It is like investing in Asian shares five years ago.You do not want to have30 per cent of your investments in there but you might want 5 per cent.”

Davies also warns that some climate change funds may not be suitable for the traditional ethical investor. Some funds have an emphasis on low-carbonor carbon-replacement technology and will allow exposure to businesses such as nuclear power, which is not usually found in traditional SRI funds.

He also says many funds are not investing to save the planet but for purely financial reasons. Davies says: “There is a differencein approach. Many climate change funds have no qualms about the fact that they are investing for financial reasons. If youare a die-hard ethical investor, then I am notsure that some ofthese funds are for you.”

Barclays equity gilt study 2008

In light of the accelerated development of emerging market giants such as China or India,it is inevitable that questions regarding sustainability beginto emerge. Such questions are valid. Indeed, an increase in developing world per capita consumption of some resources, such as oil, to developed world levels is simply impossible.

To make this point ina simple manner, considerthe implications of Chineseand Indian per capita energy consumption rising to thesame levels enjoyed by the US.

The IEA calculates that such an increase would raisethe combined Indian andChinese oil consumption by160 million barrels per day, almost twice today’s global consumption of 85mbd.

Such an increase would push total world oil demand to 240mbd, a pace of demand that would deplete proven reservesin just 15 years and ultimately recoverable resources within26 years, even if we use comparatively generous estimates of total reserves.


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