Profit From Eco-Friendly Investing
“Saving the Earth” has become a cause of action that politicians and celebrities alike are championing with new found fervour. Al Gore, the former Vice-President of the United States, emerged as the unlikely poster boy of climate change awareness, with his Academy award-winning documentary, An Inconvenient Truth, which details the devastating effects of global warming on the environment. The “Live Earth” concert series, which took place on 7 July this year, was a collaborative effort by celebrities and performing artistes around the world to promote awareness on the topic of global warming, and to trigger a global movement to solve the climate crisis. Incidentally, the brainchild behind the event is environmental protection group, Alliance for Climate Protection, chaired by none other than – you guessed it – Al Gore.
Being eco-friendly has become fashionable, not to mention profitable. Renowned fashion designer Anya Hindmarch sparked a fashion trend with the introduction of a reusable shopping bag sporting the catchy slogan “I’m Not A Plastic Bag”. Although it is debatable whether public enthusiasm and support for the cause will eventually wane, global warming is receiving unprecedented media and public attention.
The theme of global climate change has also caught the eye of fund managers, who see the latent investment opportunities present in investing in companies in the business of mitigating or adapting to global warming. Schroder Investment Management and Deutsche Asset Management have recently launched global climate change funds, both of which are currently available on the Fundsupermart.com platform.
While we are bombarded almost on a daily basis with news of how global warming is destroying this planet we call home, and stories of how politicians, celebrities and everyday heroes are leading efforts to mitigate the devastating effects of global warming, how does the theme of global climate change work as an investment theme for investors? We speak with both Schroder Investment Management and Deutsche Asset Management to find out more.
Not An Ethical Fund
Due to the nature of the theme, investors may start to think of the global climate change funds as ‘ethical funds’. Both fund houses are quick to dispel this myth. Simon Webber, one of the two Portfolio Managers of the Schroder ISF Global Climate Change Equity, says “We do not apply any ethical screen to the fund. We do not believe that it would be appropriate since the fund is solely based on the (business and investment) opportunities around (the theme) of global climate change.” Taking a similar stance, Nicolas Huber, Senior Portfolio Manager - Global Equities, DWS Investments, explains “Ethical funds often use a ‘negative list’ to exclude companies that are in some ways involved in non-ethical businesses. However, we believe that it is important to invest in companies that show significant share price appreciation potential, based on their exposure to climate change.”
Toyota – Beneficiary of an Eco-Friendly Business Model
An example of a company that has benefited directly from adopting an eco-friendly business model is the Japanese auto-manufacturer – Toyota Motor Corporation. With there being more focus on reducing carbon emissions on a global scale, Toyota has introduced a range of hybrid vehicles that utilize both gas and electric power sources. Toyota is a product leader in the field of hybrid vehicles, with over three-quarters of global hybrid vehicle market share, based on information provided by Schroders.
According to information published on Toyota’s corporate website, the Toyota Prius – its flagship hybrid vehicle model – has recently been recognized as the hybrid leader by leading automotive consumer publications. The Prius also has a list of environmentally conscious clientele, consisting of Hollywood A-list celebrities such as Julia Roberts.
Seeking Profit Generation
Both funds aim to invest in profitable companies – such as Toyota, to list an example – that are able to benefit from their eco-friendly initiatives.
The DWS Global Climate Change Fund is a Sub-Fund of DWS Invest Climate Change, which is the Underlying Fund. The focus of the DWS Invest Climate Change will be on “companies which have profitable business models based on climate changes or are in the process of finding and/or implementing friendly environmental solutions.” The underlying fund seeks to invest in companies that:
- are in the process of finding and/or implementing ways to support the reduction of environmental pollution
- have growth supported by environmental regulations
- help to reduce or manage climate risk
- help to increase energy efficiency
- help to address non-reversible changes
In a similar vein, the investment mandate of the Schroder ISF Global Climate Change Equity, a Sub-Fund of the Schroder International Selection Fund, is to “provide capital growth primarily through investment in equities securities of worldwide issuers, which will benefit from efforts to accommodate the impact of global climate change.” Schroders adds that it is the present intention of the Investment Manager to invest the fund heavily in sectors having a direct impact on efforts to mitigate or adapt to climate change, namely auto, renewable energy, utility, materials, and industrial sectors. Ongoing changes in regulations and legislation by governments globally will shape the investment universe for the fund, and as a result, the investment universe will evolve dynamically as more companies adapt to climate change.
As the global climate change funds typically do not invest in traditionally profitable industries such as financials, oil and gas, which have generated stellar profits for investors over the years, there may be concerns that the funds are not able to create enough value and profitability for investors. Both fund managers refute this claim. “We are very confident (of creating value and profitability for investors) precisely because of the fact that these (sub-themes related to global climate change) are themes for the future. There are trends and companies where we expect the growth, profitability or returns to be given a boost by climate change factors,” reassures Webber.
Sounding a confident note on the prospects of the fund, Huber is optimistic of “favourable absolute and relative returns for our (DWS) climate change fund over the long-term”.
Sustainable Investing For The Future
With the thorny issue of tackling global warming receiving unprecedented political and media attention, skeptics may question if the pledges by governments and large corporations to make a concerted effort to ‘go green’ would be backed by regulations and sustained political will.
To that end, one of the main concerns lingering at the back of investors’ minds would probably be whether the investment trends that come under the broader theme of global climate change are sustainable in the long-run.
‘The growth trend in the industry is clearly sustainable in our opinion,” opines Huber. He adds, “There are many new technologies and applications still in the pipeline, and some of the solutions may turn out not to be economically viable, but the general trend on solutions to mitigate or adapt to climate change is here to stay.”
Webber is similarly optimistic on the prospects of the emergence of new sectors in the future. “We expect any new investment trend that comes along to be long-lived. We expect environmental resources to be a trend for the next 50 years as climate change really develops.” As an example, he points out that for the power generation sectors, where there is a progressive shift away from coal and gas to cleaner forms of energy production, the process would take decades, not only years.
Stephanie Thng (Assistant Editor, Financial Adviser Representative) is part of the Editorial team at Fundsupermart.com, a division of iFAST Financial Pte Ltd.
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