NEW YORK — It is time for climate-change investing to step out of the shadow of socially responsible investing.
More than $800 billion will pour into industries and businesses trying to solve problems related to climate change, the majority of which will come by 2050. There will be enough companies involved with those issues for money managers to create investment strategies focused solely on climate change, instead of grouping those companies into an SRI strategy, a white paper from Deutsche Asset Management suggests.
The paper also details how New York-based DeAM plans to find alpha opportunities when investing in companies that focus on climate change issues.
“It’s an economic theme big enough to drive stocks if you pick the stocks that are most affected by climate change,” said Mark Fulton, DeAM’s climate-change strategist, in an interview. “If you believe that climate change is a powerful driving force in economies, then automatically it will give you an opportunity in picking stocks.”
Consultants have different views on how much interest institutional clients will have in strategies that focus entirely on businesses in the climate-change sector.
“There would definitely be an appetite if it’s stress-tested properly,” said Joseph Finn, principal and managing director at consultant Punter Southall & Co. LLC, Framingham, Mass. “Eventually we’re going to have to fix these (climate-related) problems. It’s just a matter of whether you’re finding the right manager that seems credible and has done the right due diligence to find these companies.”
“The investment case is easy to make, but you have to be careful about your timing,” warned Roger Urwin, global head of investment consulting for Watson Wyatt Worldwide, Reigate, England. He said many companies working to solve issues related to climate change are already on investors’ radar screens and their stocks are highly priced.
But Mr. Urwin added that “this is an area where perhaps research has not been as deep as it should.”
Based on several different reports from sources including the United Nations and the Stern Review, the DeAM paper estimates that $100 billion will be invested in clean energy by 2009, and there will be another $100 billion in demand for projects generating greenhouse gas emission credits by 2030. The low-carbon energy markets will be valued at $500 billion by 2050.
That makes the universe of stocks tied to climate change big enough to create strategies based solely on climate change.
“We believe there is a fundamental difference between an ethical strategy (like SRI) and climate change, and this goes to the core of the investment process,” the paper states.
SRI and other “ethical strategies” are often run on the basis of negative screens, weeding out tobacco companies, for instance. With climate-change strategies, a positive screen will be used, the paper said. “Positive screens use a best-in-class process. So leaders in low-carbon technologies or those which adopt superior low-carbon policies are eligible for climate change investment.”
Specialty investments
Climate strategies would invest in companies that specialize in issues such as water management, biotechnology, disaster control, emission-efficient power generation, energy efficiency or even companies that are finding new heating and cooling systems, for example.
DeAM’s new climate strategies will focus on several main factors when trying to pick companies that present the best investment opportunities. Government regulations and carbon prices are among the biggest factors that will determine the most successful companies, the paper states. For example, a carbon capture and storage business might not make sense unless carbon prices reach levels that make such businesses profitable.
DeAM executives are launching both retail and institutional strategies focusing on climate change. The shift away from a carbon-based economy is one of seven megatrends DeAM executives identified that will shape the asset management industry in the coming years, according to Kevin Parker, global head of asset management for Deutsche Bank.
The number of firms launching strategies specifically related to climate issues remains dwarfed by SRI strategies, which generally consider climate issues as part of their mandate. A search of the database of eVestment Alliance, Marietta, Ga., lists 17 different types of SRI strategies offered by nine different managers.
A search for climate change strategies yields one strategy — a sustainable climate fund managed by Sustainable Asset Management USA Inc., New York.
But strategies focused on climate change are starting to pop up more often, Watson Wyatt’s Mr. Urwin noted. F&C Asset Management Group, Schroders PLC and Jupiter Investment Management Group Ltd., all of London, offer strategies that focus on companies tied to climate change, though they are geared more toward retail investors, Mr. Urwin said.
