To celebrate World Earth Day we discuss how you can invest for climate change.
Investing for climate change
Investing for climate change is no new phenomena; it has been around for years but has often been associated with delivering sub-par returns. With millennial investors stepping more and more into the investment foray, and even baby boomers coming round to the idea of making ESG (environmental, social and governance) criteria a top priority, the interest in investing for the greater good has become way more focused and significant. Performance is also beginning to catch up as a number of clean energy ETFs have delivered respectable annualised returns in recent years.
Even before the climate change movement was incarnated by teenage Swedish activist Greta Thunberg - young investors, in particular, had been looking for ways to invest in the theme – and it’s easy to see why. In 2018, the UK had one of its hottest summers on record, with a scientific study also showing that such heatwaves are now 30 times more likely due to climate change . Carbon Dioxide levels have reportedly reached a three million year high, getting close to levels which will reportedly lock in catastrophic and irreversible climate change. Moreover, Earth Overshoot Day (the date on which humanity’s consumption for the year outstrips Earth’s capacity to regenerate those resources) is getting earlier each year – leading to global warming and other extreme weather events such as droughts and wildfires.
Recent research by us supports this motion, as it found almost half of Gen Zs and 47% of millennials say they would be happy to make slightly less profit if the company they invest in is more aligned with their values. If these values support the commitment of replacing some traditional energy investments with renewables then this is a step in the right direction.
Furthermore, by looking at the other side of the climate change coin, it’s clear to see why investors have lost faith in traditional fossil fuel energy companies. The S&P 500 Energy Sector has underperformed considerably over the last five years against the broader index. Investors have likely been viewing energy stocks as risky, demanding better returns from them and penalising them for high levels of leverage and imprudent capital spending. There has also been a significant change in fortunes for the S&P Global Clean Energy Index since the start of 2019. A £1000 investment would have returned you £753.50 of profit between January 2019 and February 2020 – equating to a return of 75.35%.
The trend continues when viewed in terms of global investment in renewable power and fuels, which in 2018 totalled $288.9bn - far exceeding the financial backing for new fossil fuel power according to REN21’s Renewables 2019 Global Status Report.
For investors seeking to make a difference and tailor some of their portfolio thematically around the climate change theme there are several options. There are many renewable energy companies focusing on manufacturing products and creating solutions which can limit or eliminate emissions. In particular, solar companies have been a popular choice for investors with wind and water stocks also providing opportunities. There are also an increasing number of funds and ETFs available, which have been created to follow these trends and allow investors easy access to a multitude of companies in one place.
The following investments are those which contribute towards the theme of renewable energy and/or the fight against climate change:
VT Gravis Clean Energy Income
Aims to deliver a regular income of around 4.5% per annum as well as growing and preserving investors' capital throughout market cycles. This is achieved by investing in a diversified portfolio of global listed securities which improve energy generation, supply and usage. Performance has been very strong since its inception in 2017, but has also been achieved with low levels of risk – meaning risk-adjusted returns are decent.
JLEN Environmental Assets
An environmental infrastructure investment fund seeking to generate a sustainable dividend distributed quarterly, which increases in-line with inflation. It does this by investing in projects which utilise natural or waste resources to support more environmentally-friendly approaches to economy activity. Since it came to market in 2014, it has delivered an annualised total return (including dividends) of 8.22%, outperforming the FTSE All Share by a comfortable margin – again with relatively low levels of volatility (risk).
iShares Global Clean Energy ETF
a passive index strategy allowing investors the ability to track the performance of an index composed of 30 of the largest global companies involved in the clean energy industry. The fund was launched prior to the global financial crisis and was subject to a torrid time in its initial years as the theme suffered from poor funding. More recently, performance has picked up significantly – returning almost 25% year-to-date alone.
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