Saturday, 17 November 2018

Investing for a Green Future - Part 2

In the first part of this investigation I took a look at some of the options available from the Investment Trust sector. This second part will cover funds or OEICs.

Some funds focus on 'green' themes such as renewables and clean energy whilst others will adopt a much wider perspective. They are very much a mixed bag and range between light and dark green. Some will screen out the big polluters such as the major oil companies and airlines whereas others will adopt a more pragmatic approach by holding those companies which are questionable but which are deemed best in class or are attempting to move to a more sustainable model.

Most funds will be predominantly equity based which can be a problem for those who are more risk averse and prefer a balance between equities and bonds or property.

I remain sceptical about this sector because it looks to me like it would be very easy for some of these fund houses to set up a new fund with the name 'sustainable' in the title and tweak an existing fund by adding a few companies to the portfolio which are genuinely doing the business. This is called 'greenwash' and is obviously a deception to be avoided as such funds are merely riding on the growing wave of demand for socially responsible investments from consumers.


Currently environmental, social and corporate governance (ESG) is flavour of the month. Every group will be wanting to demonstrate they care about ethical issues but the reality is that it is marginal to what they are all about. They are paying lip service to sustainable solutions without delivering any meaningful changes to their basic philosophy and business models.

Simply having the word 'ethical' or 'sustainable' in the title of a fund does not make it green. To enable DIY investors to make an informed decision, funds need to become more transparent. Last October, financial advice firm Castlefield published a 'winners' and 'spinners' report (pdf) to cast a little more light on this area.


Commenting on the industry, Rob Lake of Authentic Investor

"People do this work – and I include myself here – because they care deeply about sustainability; because of our values. The world has built an economy and an investment system that separate ‘values’ from ‘value’. They give insufficient financial value to many of the things that as individuals we value the most: a healthy environment, social justice, fairness. Climate change, inequality, the financial crisis – all are failures to align value with widely shared values". [Why We Need Authentic and Moral Investors 2017]

Also a recent update from Simon Webber, Fund Manager, Schroder's
“As an active investor, this whole issue and area is incredibly interesting and powerful, because the markets are very good at assimilating short-term information and very bad at long timeframes and discontinuities.
If we’re going to get to the middle of this century with a 70% to 90% cut in greenhouse gas emissions, it is a complete transformation in the architecture of our energy industry, as well as automotive transportation, agriculture, heavy industry and chemicals and numerous other sectors.
As investors we need to be thinking through how these industries may change in structure: which companies are positioned for that, which are not.
Some companies will just focus on maximising their short-term profits. They won’t think about investing for five to ten years down the line, whether that’s so they have a license to operate, or whether it’s for technology that their customers are going to want. These short-sighted companies will see their business start to shrink.
For active managers, there is a wealth of opportunity for us from being part of that solution. In my experience, having run a climate change-focused strategy for 10 years now, I am constantly amazed at how markets, investors, analysts, and company management teams struggle with the scope of the change that is likely coming. Therefore, there is a big role for investors and active managers to support those companies that can help us move in the right direction.”

Make a Start

So, where do we start? One good place is the Ethical Consumer guide to investment funds

They have used 3D to rank the funds according to a range of criteria.


Morningstar is another site which can be used to narrow down the options - in this case by searching for 'Equity Ecology' funds. They also have a 'Guide to Sustainable Investing' page with some useful links

Here are a just few funds I have looked at from over 120 available on Trustnet under 'Ethical/Sustainable' filter. To be honest, I am really not convinced that these funds, with a few exceptions, are moving the green/sustainable needle very far. They are certainly not recommendations and readers should carry out their own research.

Legal & General have recently launched their Future World Equity Index fund which has OCF 0.30% and seeks to avoid those companies with a worse than average carbon emission or fossil fuels and favour those that operate in a low carbon sector. However, I note it has oil giants Shell and Exxon as top five holdings!

Anton Eser, CIO at LGIM, said: "We are on the path to a low-carbon economy and companies that fail to respond to this reality present a risk to investors' portfolios. This fund not only aims to help investors navigate these long-term risks, but also provides the opportunity to take advantage of the benefits yielded by the transition."

VT Gravis Clean Energy fund was launched in December 2017 and invests in a portfolio of global companies including investment trusts which focus on the construction, supply and generation of green electricity such as wind and solar. Many of the ITs featured in part 1 are included in the UK weighting of this fund. It pays a dividend of ~4.5%.

Baillie Gifford offer their Positive Change fund which I recently added to my portfolio.

Kames Global Sustainable Equity fund was launched in 2016 to compliment their existing ethical fund. In the 2.5 years since launch, it has returned 36% and has OCF of 0.9%. The alternative Ethical Fund has lower OCF 0.75% and offers a mix of equities (max 60%), bonds and cash and has a UK focus.

Royal London offer 3 sustainable funds - World, Diversified and Managed Growth - which were the subject of my article in March 2018

FP WHEB Sustainability holds a range of eco-sensitive holdings providing some of the solutions to climate change. Themes include resource efficiency, clean energy, sustainable transport, health and water management. This fund scored well on the Ethical Consumer rankings so is worthy of further consideration.

Janus Henderson offers its Global Sustainable fund (previously Global Care fund) launched in 1991 and has OCF of 0.84%.

BMO (formerly F&C) Responsible Global Equity invests in a diverse range of ethically screened spread of global equities. It has been around in one form or another since 1987 and has OCF of 0.82%. Top holdings include Apple, Mastercard, Amazon, Prudential and Union Pacific Corpn.

Liontrust Sustainable Future Global Growth invests in a range of global companies which fit their sustainable criteria. The OCF is 0.93%. Lead manager Peter Michaelis was previously head of SRI at Aviva Investors.

Pictet Clean Energy is a global fund which holds at least two thirds of its portfolio in companies that contribute to and benefit from the switch to low carbon energy souces. OCF is 1.23%.

Schroder Global Climate Change fund was established in 2007 and adopts a broad thematic approach investing in those global companies which are most likely to form part of the solution to the threats of climate change. It has OCF of 0.82%

Jupiter Ecology fund was one of the first fund of its kind to be launched in the UK in 1988 and has been managed by Charlie Thomas since 2003. The globally diverse fund has a focus on companies providing solutions to environmental and social issues. The OCF is 0.78%. The fund however does not seem to have a good long term performance record compared to its benchmark.

Conclusion

So, just a small sample of funds that caught my attention whilst trawling through the many options now available to the DIY investor.

Whether we accept the science or not, the investing landscape is changing almost as rapidly as the weather and investors, whether DIY individuals or professional, need to be aware of the changes in public opinion.


We have seen on our TV news over the past week the devastation, destruction and loss of many lives caused by wildfires in California. They have been the worst in living memory and most put the causes down to global warming. This is not something to contemplate for the future - fundamental changes are happening right now.

Climate change will most likely be the main driver of policy changes and regulation which will fundamentally alter the way we live, work and make plans for the future. It will have a huge impact on the investing landscape.

In the next instalment I will take a look at what is on offer from the world of ETFs and other more specialist or niche providers.

Feel free to comment below if you hold any green or ethical funds in your portfolio.

4 comments:

  1. Abundance Investment (abundanceinvestment.com) is one place where you can start if you want to invest in sustainable businesses.
    I like the idea of putting my money to work in sustainable ways and I have previously invested in EIS eligible wind/solar/hydro electricity schemes in the UK. They have performed well today (between 5-9% return before the tax rebate and with strong inflation proof revenue streams).
    Unfortunately, the EIS benefits and FITs are no longer available and they don't look as attractive anymore.

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    1. Thanks GFF. Weenie and The Investor mentioned Abundance in replies to Pt1 so it is on my list for further research.

      The government doesn't really attach much importance to climate change otherwise they would not remove incentives to promote clean energy projects.

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  2. Hi nice blog :)

    Greetings from a Swedish Investor

    www.swedendivin.se

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    1. Thanks. I think your are the first person to comment from Sweden! Good luck with your early retirement journey.

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