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Achieving good 'green' returns

John Baron describes his company’s investment approach to climate change
Achieving good 'green' returns

COP26 has again reminded investors that climate change is a key element of the investment landscape. Predictions of environmental, societal and economic harm if global warming is not limited to acceptable levels highlight the consequences of getting this wrong. Yet, despite their protestations, swathes of the asset management industry appear slow in responding and have had little or no effect in reducing the growth in our carbon footprint in recent decades. Actions do not match some fine words.

Furthermore, the related environmental, social and governance (ESG) themes serve only to confuse if not worse, at least in part because there are no standard definitions. Being opaque, they offer little genuine choice to investors. This is one reason our website focuses on the more transparent and clearly defined remit of climate change – the Green portfolio having also outperformed the FTSE All-Share since inception.


Successes and failures

Despite China and India’s last minute change to the agreement, which calls for the ‘phase down’ instead of ‘phase out’ of coal power, the UN climate chief is right to say that the COP26 summit deal is a huge step forward. Positives include the unprecedented inclusion of a coal pledge, over 100 world leaders agreeing to end and reverse deforestation by 2030, the methane agreement, annual progress reports and the increase in aid to climate-vulnerable countries. Alok Sharma, its president, deserves praise for achieving a consensus – helped as it was by the UK’s record in many areas.

However, it is also fair to say that the summit’s overall goal of charting a course to keep climate warming limited to 1.5C by 2100 in order to avoid the worst impacts of climate change is still in the balance. There is more to do if this objective is to be achieved, but at least COP26 has provided more tools to reach that goal. For example, countries are expected to report next year on the progress of their commitments – success or failure when it comes to the necessary incremental steps will be very transparent.

It is therefore a shame that the asset management industry is not responding as robustly. There are, of course, exceptions but concerns abound including the extent of ‘green-washing’ and the lack of clarity regarding accepted accreditations and terminology – particularly when pertaining to the ESG themes. There are no standard definitions adhered to by fund managers. This allows variance in processes and approach which can make it difficult for investors when selecting investments.

And investors are not alone in seeking clarity. Nick Britton, head of intermediary communications at the Association of Investment Companies (AIC), the investment trust sector’s trade body, has recently said of financial advisers: “Our research shows that scepticism around the whole concept of ESG investing is now fairly rare among advisers. However, the fog of jargon and competing metrics and standards is confusing even for those who regard themselves as knowledgeable on the subject.”

A less generous interpretation as to this disconnect might be to suggest some industry quarters are using the ESG label as a marketing gimmick to keep the investable universe as large as possible, as they fear divesting would adversely affect performance. Commitments to net-zero many years ahead are unlikely to be overseen by the incumbents who are making the promises today, and so cannot affect any performance bonuses.

Shorter-term incremental targets which are transparent would be more testing, and could be included by boards as part of the wider remuneration package. This is not happening at the moment. And this disconnect is very obvious when investment chief executives suggest climate risk is investment risk, and yet rank poorly among peers when voting on important climate resolutions.

That climate change does present significant risks for investors, if not adequately contained, should not be in doubt. The National Intelligence Committee (a US government body) confirmed the obvious in suggesting unacceptable climate change could lead to greater geopolitical conflict as countries take further steps to protect their interests – water and mineral scarcity being two possible catalysts.

Dire UN warnings about food security, including the threats posed by droughts and floods, is a further risk – especially given forecasts regarding global population growth. Extreme weather will also particularly affect more vulnerable countries and their sometimes fragile healthcare systems. The World Health Organization believes climate change presents a significant – perhaps the most significant – health challenge. Resulting mass migration could also contribute to cross-border conflict.

Quantifying the economic impact of such events is difficult. One pessimistic prediction suggests the global economy could be one-fifth smaller by 2050, while forecasts for some of the more fragile Asian countries are particularly dire. Regional crises, in addition to a general slowing or contraction of global growth, may be one consequence. Investors need to be aware of the heightened risks, both by theme and region.

However, the economic upside of embracing the necessary technologies to better combat climate change should also not be ignored. Many thousands of jobs will continue to be created and many businesses will prosper. Investment trust portfolios look particularly well placed to benefit given their close-ended structure provide the ideal long-term incubator environment needed to best nurture such investments, given the time horizons often required.


The Green portfolio

The two portfolios regularly covered in this column are two of nine real investment trust portfolios which are managed on the website in real time. Although the theme of environmental protection is pursued by a number of the portfolios, the website’s dedicated Green portfolio is listed opposite. While the ‘Positive impact/change’ terminology has greater clarity than the ESG label, a climate change portfolio was chosen given the remit’s significance, clarity and urgency.

As seen, investment trusts essentially fall into two broad categories – environmental trusts that invest in companies with eco-friendly products and services, and infrastructure companies that focus on renewable energy. As the sector’s investment landscape evolves, other related holdings are being added to assist with diversification and to accommodate emerging technologies. As such, the portfolio comprises a balance between mature companies, offering stable and growing incomes, and those more recent to the market.


The Green Portfolio

Breakdown (to 31 October 2021) 
Impax Environmental Markets (IEM)8.0
JLEN Environmental Assets Group (JLEN)7.5
Jupiter Green (JGC)6.0
Premier Miton Global Renewables (PMGR)4.5
VH Global Sustainable Energy Opportunities (GSEO)3.0
Renewables – general 
GCP Infrastructure Investments (GCP)7.0
The Renewables Infrastructure Group (TRIG)6.0
Aquila European Renewables Income (AERS)4.5
Octopus Renewables Infrastructure Trust (ORIT)4.0
Downing Renewables & Infrastructure Trust (DORE)3.0
Ecofin US Renewables Infrastructure Trust (RNEP)2.5
Renewables – specific 
Greencoat UK Wind (UKW)7.0
Foresight Solar Income Fund (FSFL)5.0
Bluefield Solar Income Fund (BSIF)3.5
US Solar Fund (USFP)2.5
Gresham House Energy Storage Fund (GRID)7.0
SDCL Energy Efficiency Income Trust (SEIT)5.5
Gore Street Energy Storage Fund (GSF)5.5
Triple Point Energy Efficiency Infra Co (TEEC)3.0
Aquila Energy Efficiency Trust (AEET)2.5

The additional portfolio categories of ‘Renewables – specific’ and ‘Related’ drill down into these two categories in a little more detail. For example, the sub-sector of battery storage is highlighted given its importance in helping to ensure balance between peak consumer demand and renewable energy supply. The emerging technologies relating to energy efficiency are another example.

And investors need not unduly sacrifice returns when pursuing such just causes. Since the portfolio’s inception in April 2019, it has produced a total return of 24.8 per cent compared with 13.6 per cent for the FTSE All-Share. Meanwhile, it offers a decent income level presently equating to a yield of 3.8 per cent.

Looking forward, the intention is for the website to introduce a ‘Green Isa’ portfolio comprising just eight holdings – making 10 portfolios in total.