By MARK HINTON 14/06/2007
The green bandwagon has been gaining significant momentum of late, with climate change dominating the news. It’s therefore little surprise that prominent investment groups Jupiter and Schroders have announced plans to launch climate change funds later this year. The merits of trying to preserve our fragile environment are without doubt and ethical fund performance has also been generally impressive over the last three years, so is there a strong investment case for turning your investment portfolio green?
In terms of performance, the strong returns of recent years must be taken with a pinch of salt. Much of this has been due to the structural nature of ethical funds rather than the ethical investments booming per say; ethical funds tend to bias medium and smaller companies as large companies often struggle to meet ethical criteria. Given that this end of market has generally trounced large companies over the last three years, ethical funds have obviously benefited. The other key point to bear in mind is that ethical funds tend not to invest in oil, gas, mining, tobacco, pharmaceutical and defence companies, so big movements in any of these sectors will impact ethical fund performance versus conventional funds. For example, struggling oil, gas and pharmaceutical sectors over much of the last year has been good news for most ethical funds.
Whereas ethical funds tend to invest similarly to conventional funds (subject to filtering out unethical companies) green funds normally focus more directly on environmental issues such as clean energy, water/waste management, green transport and sustainable living. These are the types of fund you would therefore most expect to benefit from a global shift towards such practices, whether voluntary or due to legislation. There’s little doubt that these funds stand a reasonable chance of prospering over the next 10-20 years, as it’s unlikely climate change concerns will go away. However, funds with alternative energy exposure continue to be influenced by the oil price shorter term; if the oil price is high alternative energy is attractive and vice versa when it is low. Until oil supply starts to dry up, or we're all compelled to use more alternative energy, it's hard to see the current situation changing.
Aside from specialist ethical/green investments, we would like to see more conventional fund managers actively engage with the companies in which they invest. F&C deserves much credit for taking the lead in this respect, it publishes details of its activities and how its fund managers have voted as shareholders of the companies held in their funds. Fund manager engagement is vital not only to improving the standards to which companies are run, but can also play a major role in encouraging companies to pull up their socks on very important ethical issues. This means that even managers of non-ethical funds can get involved with ethical issues, which may help both the environment and their investors. We believe such actions will increasingly be taken in to account when buying funds.
Should your portfolio be turning green? The good news is that if you wish to there is now sufficient choice of ethical equity and bond funds to build a reasonably diverse portfolio. If you’re more concerned about performance I don’t think there is a compelling reason to go green in the shorter term. The potential payback from green investing is likely to be longer term and other more general market factors are likely to influence shorter term performance. Also bear in mind that mainstream fund managers may start to invest more heavily in green stocks if they think there’s money to be made, so it’s likely that conventional portfolios will naturally start to adopt a natural green bias in future.