Can You Profit from Global Warming?
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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.
"We're optimistic about the opportunity here because we think it stands on its own" as a potentially profitable proposition, says MGI Director Diana Farrell. But, she adds, slowing global demand for energy "probably won't happen without thoughtful intervention" from regulators. Conversely, if governments raise minimum efficiency standards to fight climate change, she says, investors will likely back firms instrumental to such transitions and reap profits.
Despite its lack of a social mission, the DWS Climate Change Fund is structured to give exposure to this area of energy productivity, which MGI highlights as a top priority as demand climbs worldwide in coming years. Firms that make energy-saving products, such as high-quality insulation and compact fluorescent bulbs, make up 20 percent of the fund's holdings. Another 20 percent encompasses natural-resource management, including environmental consulting. The last 60 percent targets clean-technology, such as wind and solar stocks.
Meanwhile, funds with a bent toward finding solutions are taking divergent approaches. The Winslow Green Solutions Fund, which launched Nov. 1, weights the clean-energy sector most heavily in its portfolio. That's followed by resource efficiency, green building, and environmental services. Meanwhile, the Calvert Global Alternative Energy Fund takes a more concentrated approach by focusing on renewable-energy producers, such as wind, solar, and tidal, and including utilities that foresee a growing role for renewables in their source mixes. Nuclear technology is largely left out due to Calvert's misgivings about waste disposal and safety issues.
"We do not want to encourage investment dollars going to nuclear at the expense of wind, solar, and biomass," says Bennett Freeman, senior vice president for social research and policy at Calvert. "We really think it's fundamentally important that those emerging renewables industries, those sectors, attract significant investment resources."
For investors, Calvert's bet on alternatives has been a roller coaster. After the fund's June launch, it earned a handsome 30 percent during the second half of 2007, a period when market turmoil sent the S&P 500 Index down more than 11 percent. But over the first five weeks of 2008, the fund gave up most of those profits as its net asset value fell by 22 percent.
Other funds, meanwhile, expect a host of sectors to be involved in responding to climate change. The Global Climate Change Equity Fund, available to Europeans from Schroders in the United Kingdom, includes among its top 10 holdings both nuclear giant Exelon and luxury auto manufacturer Rolls Royce. These and the fund's 72 other holdings are presumably well positioned to "benefit from efforts to accommodate the impact of global climate change."
In the US, the Spectra Green Fund takes a best-in-class approach by including companies that seem to be making environmental progress in less-than-green industries. Its holdings include oil titan British Petroleum and Coca Cola, whose usage of water resources has come under fire from environmentalists. Beyond the realm of mutual funds, six new exchange traded funds (ETFs) have launched within the past year with focuses in such climate solution-minded areas as clean energy and nuclear energy.
For now, the landscape is littered with opportunities for trial and error. And those concerned about climate change aren't disturbed one bit by all the interest in the subject. "These are all ways that groups are trying to grapple with the issues of climate change, producing renewable energies, finding alternative ways of consumption," Coleman says. "There's room for all of them."