Environmental funds set to alter investment climate

After the summer lull in product launches, climate change funds are taking centre stage. As reported in last week’s Fund Strategy, F&C is set to unveil an offshore Global Climate Opportunities portfolio, with a sterling share class for British investors. The announcement coincided with the launch of Schroder’s Global Climate Change fund, an onshore unit trust based on the firm’s $180m (90m) Sicav.

Allianz Global Investors (AGI) has also revealed that it is test-marketing an onshore version of its Global EcoTrends fund. The Sicav, run by Bozena Jankowska (pictured, above), is a hit in continental Europe. AGI revealed that it hit $1 billion in assets under management in September, just 14 months after launch. Nick Smith, head of retail at AGI, says the bulk of the money has come from Germany, Asia and America.

F&C and Schroder have been quick to present their products as sound investments, rather than moral statements. F&C pointed out that its portfolio will not use negative screening as part of its process. Schroders, meanwhile, is benchmarking its fund against the MSCI World index, demonstrating its confidence in achieving superior returns from climate change investing.

The arguments behind the approach are compelling. A report published by UBS in June – called ‘Reacting to Climate Change’ – pointed to the signing of a climate accord by America, on June 7, as “the beginning of a new phase in climate change politics”. Government policies will have macro effects, said the report, and risks will emerge at the sector and individual company level. Increased environmental regulation will “create new markets, or, at the extreme, render some markets or products obsolete”, it warned.

The report identified several sectors likely to thrive or suffer under likely changes in regulation and climate. Automobile manufacturers and telecom companies were rated as negative, while sectors expected to benefit included chemicals, pharmaceuticals, technology and insurance. The report also rated capital goods, electricals and engineering firms as positive. Indeed, two of its “six companies to own” – ABB and Siemens – were taken from this category.

Simon Webber, co-manager on the Schroder fund alongside Matthew Franklin, expects climate change to affect every sector. “It is not just about building wind farms,” he says. Webber’s fund is biased towards industrials, cyclicals and utilities.

He also regards nuclear energy as “highly investable” and adds that investment from the American government is set to boost the sector. The fund has little exposure to banks or healthcare, although Webber (pictured, page 13) says he “thought hard” about investing in HSBC.

The bank announced that it had achieved carbon neutrality in October 2005, by offsetting its carbon dioxide emissions. However, Webber says he is making investment decisions based on future returns, rather than “moral judgements.” He says: “The time is right for a performance-led product and I only want companies where climate change will have a big impact over the next five years. Going carbon neutral was a nice thing for HSBC to be able to say. But I can not say that a lot of customers will go there because of that statement.”

AGI’s Smith says investors are increasingly coming round to Webber’s pragmatic, rather than ethical, approach to climate change. He adds that the response from IFAs to an onshore Global EcoTrends fund has been “pretty positive”.

Katy Gladstone, co-head of Henderson Global Investors’ multi-manager range, is also upbeat on the long-term investment story. She “significantly” increased the Henderson funds’ exposure to Impax’s Dublin-domiciled Environmental Markets Oeic and the Jupiter Green investment trust, in July.

Gladstone says several factors are driving returns in the sector. She says: “There are limited natural resources, and a consequent need to increase efficiency. There is growing social pressure in this area and also regulatory change – increased recycling targets for example. We are also seeing higher levels of M&A activity.” Gladstone says she first took positions in the Impax and Jupiter funds last summer, as part of a general growth play.

Impax Environmental Markets invests globally, with a focus on companies providing energy, water and waste services. The Jupiter fund has a broader remit, investing in a further three categories – sustainable living, environmental services and green transport. However, both funds seek to invest in companies providing positive environmental “solutions”, rather than the Schroder fund’s wider objective of profiting from climate change.

One of Webber’s largest holdings, for example, is Agco, a manufacturer of agricultural equipment. The firm is set to benefit from the disruptive impact of climate change on crop yields and consequent higher prices, as well as the growth of biofuels. Global Climate Change holds about 75 stocks overall, with 11% of its assets in British companies. The fund invests across the cap range, although Webber’s largest holding is General Electric.

However, some investors are wary of this new breed of funds, despite agreeing with the underlying long-term arguments. Tim Cockerill, head of research at Rowan & Co Capital Management, says climate change funds have a “bandwagon feel” to them. He says: “It reminds me slightly of the technology boom, where expectations of what the internet would deliver got everyone excited. Ultimately, climate change will be central to a lot of portfolios but the danger is that interest may wane in a couple of years if the sector underperforms.”

Whatever the future for the funds, climate change looks set to remain at the top of the political agenda. David Miliband, Britain’s Foreign Secretary, called climate change the single biggest threat to global equality, in a speech to the United Nations last week.