Three investment trusts to take advantage of climate change

Regular readers will be aware that the two portfolios covered in this monthly column are two of 10 real investment trust portfolios managed in real-time on the website. Previous columns have highlighted some of the companies that have given expression to this gradual pivot towards equities, which has focused on the UK market and private equity given their valuation and outlook. This pivot has also been ongoing within the website’s two portfolios that are focused on protecting the environment.

The challenge

The COP26 climate summit reminded investors that climate change is a key element of the investment landscape. However, despite honourable exceptions, the asset management industry has been slow in responding and has had little effect in reducing the growth in our carbon footprint. Actions have not matched some fine words. Furthermore, the related environmental, social and governance (ESG) themes continue to confuse – despite modest regulatory progress now trying to put this right. The column ‘Achieving good green returns’ (IC, 19 November 2021) remains apt in explaining our approach in more detail.

This is one reason why my website’s Green and Green Isa portfolios focus on the more transparent and clearly defined remit of climate change – the latter caters for members who are starting their investment journey and/or those with smaller portfolios. Within both, there has been a modest shift away from the more defensive renewable infrastructure sub-sectors that invest directly in plant, facilities and farms, towards environmental companies that invest in the shares of businesses with eco-friendly products, services and technology – the three companies highlighted below are examples of the latter.

Trusts for the green journey

Impax Environmental Markets (IEM) invests in businesses that will benefit from the growth in demand for cleaner and more efficient delivery of energy, water and waste. The transition to net zero will continue to provide good opportunities, particularly for those companies with the necessary resources – IEM’s management team is one of the largest in the industry with more than 80 investment professionals and c£45bn of assets under management. In an industry where there is a sudden welter of new-found expertise, such scale and expertise are valued assets. The track record has been very good over the two decades of the company’s existence, despite one or two testing years.

Despite market volatility, the managers continue to point to the sound performance of the portfolio’s businesses coupled with their meaningful de-rating in recent years. If anything, the secular growth of their markets has been reinforced by various government initiatives and policies, technological advances, consumer attitudes and activist lobbying, together with climatic events. Other geopolitical events, including the invasion of Ukraine and China’s more assertive foreign policy, have further increased energy security concerns. The net zero transition is set to continue almost regardless of the macroeconomic headwinds, even though the journey may not always be a smooth one.

Premier Miton Global Renewables (PMGR) seeks income and capital growth from businesses that operate primarily in the renewable energy sector and other sustainable infrastructure investments – the benchmark being the S&P Global Clean Energy index. James Smith has been the manager since 2012 and performance has been sound, despite a change in benchmark and remit. There has been an increased focus on renewable energy businesses given their exposure to rising power prices courtesy of inflation. The invasion of Ukraine has also added to this dynamic as Europe looks to reduce its dependence on Russian natural gas.

The company is due to pay a dividend of 7.4p for the current year, which presently equates to a yield of 5.5 per cent, and possesses a healthy revenue reserve should markets and income streams prove volatile. Meanwhile, the company’s zero-dividend preference shares help to account for a high level of gearing, which should be helpful if our positive stance on the sector proves correct over time. However, this has acted against the company during the recent market volatility. As such, a discount of around 15 per cent seems a little uncharitable given the outlook.

Jupiter Green Investment Trust (JGC) invests in a globally diverse portfolio of companies providing environmental solutions, with a bias towards small and medium-sized companies – hence the MSCI World Small Cap (US$) index benchmark. Jon Wallace co-managed the fund since January 2021 and became the lead fund manager a month later, since when he has made an encouraging start. Because of a healthy long-term growth backdrop for environmental themes, with energy security concerns reinforcing the long-term case for accelerating the energy transition, he has been using market volatility as a buying opportunity.

He highlights a recent Intergovernmental Panel on Climate Change (IPCC) report which shows not just the effects of burning fossil fuels ‘downstream’ for energy, but also the consequences of exploration/production ‘upstream’ activities in contributing to methane emissions – these accounting for about 25 per cent of the rise in global temperatures since the industrial revolution. He continues to see good investment opportunities relating to solutions in tackling not just climate change but other linked environmental challenges such as biodiversity loss. Being focused on smaller businesses in the sector, JGC complements the other two more equity-focused companies within both portfolios.

It should be highlighted that both JGC and PMGR are smaller capitalisation companies and so go against my website’s policy of focusing usually on larger companies when pursuing respective remits. However, given this sector’s evolving investment landscape and the dearth of such companies, and the aim of holding companies for the long term once bought, greater flexibility has been adopted for these portfolios. The companies should grow over time as this still embryonic theme continues to evolve in response to the opportunities and challenges of climate change.

Finally, and more generally, largely because of market concerns about high (and perhaps higher) interest rates and the economic outlook, this sector (together with some other alternative assets) has seen a significant derating – average discounts have widened as never before. Higher discount rates bring into question the value of future cash flow, even though that cash flow remains real. And while long-believing inflation will remain ‘stickier’ and more volatile than consensus had hitherto believed, sector (and market) sentiment is overly negative – yields of 5.5 per cent and 4.2 per cent for the Green and Green Isa portfolios, despite the pivot into these three lower-yielding companies in aggregate, is one such signal.