COP21 shows that environmental investing is more than just hot air

There are more ways to benefit from the fight against climate change than investing in wind farms and solar panel makers. The industry is maturing and there are several ways investors can gain exposure to the political will and innovation that is working to reduce the greenhouse gas emissions behind climate change. Companies specialising in energy efficiency, environmental testers and those helping cars and planes to use less fuel are some of the other options available.

Backing the fight against climate change has not been a mainstream market and investors have been right to be cautious in previous years. Take alternative energy as an example. A look at the MSCI Global Alternative Energy Index shows that £100 invested 5 years ago would be worth £67.20 today, while sticking £100 into a FTSE tracker would put £110.90 in your pocket over the same period.

Losing money: The MSCI Global Alternative Energy Index

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

Fund managers focusing on the market believe that this is changing and it’s all thanks to technological breakthroughs and a little help from some of the world’s most powerful people.

On Monday 30 November the 21^st UN Conference of Parties climate change summit, known as COP21, kicks off in Paris with the aim of getting more than 190 governments to agree to greenhouse gas emission reduction targets in a bid lower the climate change threat. There is good reason why world leaders are making room in their busy schedules to attend. If the greenhouse gas emissions caused by burning fossil fuels continues to rise then so would temperatures around the world and they could reach dangerous and irreversible levels.

If proof were needed of the severity of the threat then look at China. Air pollution kills more than 4,000 people a day in the country, according to environmental research group Berkeley Earth. To reduce the cause of 17% of all deaths in the country, China’s government has set a target of generating 20% of its energy from wind, solar or nuclear power by 2030. 

Policy makers

If the Paris summit results in a cap on the level of greenhouse gas emissions it could be a problem for traditional energy markets but drive demand for alternative energy companies or those developing cleaner technologies.

There are two core trends that investors could look at if they want to add an environmentally-friendly or ‘green’ company to their portfolio:

• Transformational – Companies that are, or helping to, generate alternative forms of energy, such as wind, solar or wave.
• Transitional – Businesses that make established industries more environmentally-friendly by cutting greenhouse gas emissions, such as transport.

The political will to improve the environment is strong, but this is not the only reason why investors should assess some of the options the market offers. Charles Thomas, Jupiter Asset Management’s head of strategy, environmental and sustainable investment, believes technology will be the backbone of future policy commitments rather than being driven by regulation.

One catalyst is that it is getting cheaper to generate renewable energy, making the industry more competitive against traditional forms of energy. Thomas claims that the cost of solar production has fallen by 80% in the past eight years, while wind costs are 35% lower than they were three years ago. ‘We are confident that technology will continue to reduce in cost and become more competitive as time goes along,’ he said.

There are more companies moving into this space for investors to assess than ever before. The number of businesses across the globe in Jupiter Green Investment Trust’s universe is around 1,200, a huge leap from the 300 or so that it was monitoring in 2003.

In the mainstream

In investment terms environmental issues were niche 10 to 15 years ago, but today they are in the mainstream when it comes to policy-making, corporate thinking and consumer behaviour. ‘The transformation from niche to mainstream has only just started,’ Thomas says. ‘This is potentially an exciting phase over the next 10 years as more of these issues become more mainstream.’

Technological developments to improve fuel efficiency in vehicles will be key going forward, considering the number of cars and planes in the world. Reducing emissions in the transport sector is not just about building more electric cars, but making the existing and future fleets of internal combustion engines use less fuel.

There are several companies that investors could choose to add exposure to green industries to their portfolio and buying a fund could not only reduce risk but also allow access to international businesses.

The funds

Environmental Investment Trusts - ranked by five year return

Renewable Energy Investment Trusts - ranked by one year return 

Alternative energy funds - ranked by five year return

Source: AJ Bell YouInvest 

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

These are just some of the funds available and could give exposure to companies such as BorgWarner, which downsizes engines and adds a turbo to improve fuel efficiency. Then there is Toray, which replaces metal on planes with carbon fibre to make them lighter and improve fuel efficiently. Sustainable technology specialist and FTSE 100 member Johnson Matthey, which makes catalytic converters among its product range, is another company you might find in their portfolios. Japanese environmental testing specialist Horiba and efficient water heater-maker AO Smith are also present. 

On the renewable side researching these funds could throw up exposure to Vestas Wind Systems and wind farm companies EDP Renovaveis.

As always, doing your research is crucial. As part of your research look at the manager’s track record and the fund’s performance during what the MSCI Global Alternative Energy Index shows has been a difficult period for some green stocks.

For those expecting such stocks to shoot higher in the coming months’ remind yourself of a quote by Microsoft co-founder Bill Gates on how long it takes for momentum to build behind a new idea.

‘We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.’

Mark Dunne

AJ Bell Head of Research