Can You Profit from Global Warming?

By G. Jeffrey MacDonald, Christian Science Monitor. Posted February 26, 2008.

One day in late January, a few creative Californians dramatized the onset of climate change by filling a stretch of Rodeo Drive in Beverly Hills with snow and letting snowboarders show off in the sunshine.

Organizers of the stunt, however, weren't looking to inspire lifestyle changes or environmental activism. Their goal was to attract investment in the DWS Climate Change Fund, a five-month-old mutual fund that aims not to fight climate change but simply to profit from it.

"We're really tackling this as an investment opportunity, as opposed to being socially responsible or believing that you can change the world" through investing, says Antonio Galloni, product specialist for the DWS Climate Change Fund. "Climate change is one of the megatrends that will drive investment opportunity in the coming years and decades. It's going to affect every company and every sector."

As climate change becomes a mainstream issue, it's also gaining traction as an important theme for investors eager to profit from big trends emerging on the horizon. At least nine new mutual funds have launched in the United States and Europe over the past year to capitalize on the theme. Earlier this month, more than 400 institutional investors gathered at the United Nations for a summit on using investable assets to advance solutions to climate change.

But as the DWS Fund demonstrates, not all investment products with a climate-change theme are committed to finding solutions. What's more, strategies of climate-change-related funds vary wildly and lead to portfolios that sometimes have little in common with one another. This poses a challenge for investors aiming to put their money where their environmental values are. One risk: Despite intentions to the contrary, they could at times be profiting from climate change without doing much at all to fight it.

How investors can fight the good fight on this issue and still make money isn't easy. That's because the problem of a warming planet is colossal in scope and proposed solutions are largely still in development, according to Frank Coleman, executive vice president of Christian Brothers Investment Services, a money management firm charged with investing assets for Roman Catholic institutions.

Climate change-related funds "are all coming at it with different approaches," Mr. Coleman says, "because we don't know which approach is going to work or which are going to take hold in the minds of investors."

As world leaders debate what to do about climate change, mutual funds are in effect placing bets on which sectors and companies will thrive in a future, "carbon-constrained world." That's the view of Leslie Lowe, director of the energy and environment program at the Interfaith Center on Corporate Responsibility, a coalition of 275 faith-based institutional investors.

Yet because carbon isn't regulated as a pollutant, she says, industry analysts are just now developing techniques to determine which firms are most at risk in a setting marked by stiffer regulation.

"Tools for doing the analysis are really immature," Ms. Lowe says. "So anyone can say, 'I've got a green fund.' And who's to say any different?"

Nevertheless, researchers are educating investors on how to deploy assets both for profit and environmental solutions. This month, McKinsey Global Institute issued a report that says that with targeted annual investment of $170 billion, investors could cut in half the rate by which global demand for energy is projected to grow over the next 13 years. And they could do it while earning an average projected annual return of 17 percent.

The key, the report suggests, lies in getting more productivity per unit of energy consumed in four primary sectors - commercial, industrial, residential, and transportation. For solution-minded investors, this means putting their money in enterprises whose stock-in-trade involves energy-related services, such as engineering and design.

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