Don’t overlook mid-cap investment opportunities
When different areas of investment are compared, they are often different assets like equities vs...
The sixth report from the Intergovernmental Panel on Climate Change (IPCC) in August 2021 made headlines when the UN Secretary General called the report a ‘code red for humanity’. The evidence today is clear: from wildfires in Greece, Turkey and California, to flooding in Germany and China, and heatwaves in Canada, it’s obvious that the climate is in dire crisis and action is required sooner, rather than later.
The report outlines that each of the last four decades has been successively warmer than any decade that preceded it since 1950*. What’s more, since 1970, global surface temperatures have risen faster than in any other 50-year period over the past 2,000 years*. Humans have caused unprecedented and irreversible change to the climate and our future could “become some kind of hell on Earth” according to Prof Tim Palmer at the University of Oxford.
As Randeep Somel, fund manager at M&G, put it “this report should hopefully be a stark reminder to all the leaseholders of our planet, be they consumers, industry or governments, that action needs to be taken sooner, and that we all have our part to play.”
We need to act now.
“It is unequivocal that human influence has warmed the atmosphere, ocean and land.” — IPCC AR6 report, August 2021
According to the IPCC, temperatures will continue to increase until at least the mid-century under all emissions scenarios considered. It is “more likely than not” that the world will reach 1.5°C sometime over the next 20 years – bringing forward the last estimate by a decade. And far greater global warming is possible if little is done.
Once we hit 2°C, the world will become a profoundly different place. There will be almost no coral reefs, devastating heatwaves, wildfires will become more frequent and could make some parts of the world uninhabitable. Limiting global warming to 1.5°C at this stage requires rapid and unprecedented changes in all aspects of society.
While there has been a lot of talk around net zero in the UK, the 2021 Budget delivered in March of this year gave little time to the finances required for the government’s net zero target. The word “climate” featured just nine times, compared to 31 last year, with “net zero” referenced seven times, down from 17.
One of the most significant areas covered was green finance, including the release of at least £15bn of “green bonds” – rumoured to be issued this summer. These are government bonds dedicated to supporting net zero. Although we’re yet to see the release of these bonds to market, the Rathbone Ethical Bond fund is an option for those looking to add sustainable fixed interest products to their portfolio. The Liontrust Sustainable Future Managed fund also has the ability invest up to 30% in sustainable gilts.
Moving forward, the government has a choice about where to direct funds to the post-covid economy. Infrastructure and the ‘build back better’ plan has been an area of focus, for example.
As Will Argent, investment adviser to the VT Gravis UK Infrastructure Income fund, told us last year, renewables will play an important role in the post-crisis economic recovery: “I think infrastructure spending will be used in order to help us out of this recession,” he said. “The government’s making all the noises that suggests that will be the case.”
Thankfully, a number of Elite Rated funds are linked to this theme: First Sentier Global Listed Infrastructure and M&G Global Listed Infrastructure both invest to varying degrees in green energy infrastructure.
Combating climate change is a group effort, however, and the transition will require not on only government spending but individual investment.
Britain’s goal is for net zero emissions by 2050. To achieve this, the UK has announced a number of initiatives such as a ban on new petrol and diesel car sales by 2030 and new gas boilers by 2035. These costs will largely be absorbed by the consumer with new electric cars, which aren’t cheap, and the installation of new boilers to thousands of homes across Britain.
More on this topic: The journey to net zero
One obvious beneficiary is Tesla, the world’s largest electric vehicle (EV) maker. Tesla has been a holding in the Scottish Mortgage Investment Trust since 2013 and today makes up 4%** of the trust’s overall portfolio. EV and hybrid cars also require an increased number of semiconductors and chipmakers are in a position to benefit from this transition. ASML, a Dutch semiconductor company, is the world’s leading chipmaker and a holding in Capital Group New Perspective, Janus Henderson European Focus, Jupiter European and Rathbone Greenbank Global Sustainability.
Investing in the companies helping us reach net zero is another way of doing our part.
Artemis Positive Future
This global equity fund is looking for those firms making a material positive impact on the world through either environmental or social improvements. These companies will sit at the axis of technological and sustainable change, looking to disrupt old economies. It’s a highly concentrated portfolio of growing companies, with a bias towards mid-caps, doing something uniquely different in the sector.
Montanaro Better World
This global equities fund also invests in businesses whose products or services are making a positive impact on the world. To identify these firms, the team has six impact ‘themes’: environmental protection, the green economy, healthcare, innovative technologies, nutrition and well-being. And, in order to stay true to these themes, the team will also exclude companies that are causing harm, such as those involved in tobacco, weapons and fossil fuels extraction.
Ninety One Global Environment
This is a truly unique fund that only invests in companies that are contributing to the decarbonisation of the world economy, which means it is set to benefit from the massive tailwind of the some $2.4 trillion of annual spend required to meet global temperature goals. As well as avoiding creating carbon emissions, companies will also have to have at least 50% of their revenues from three sectors: renewable energy; efficient use of resources, and electrification.
BMO Responsible Global Equity
The aim of this fund is twofold: to avoid unsustainable business practices; but also to invest in companies where there are problems to be resolved. The constraints include; no alcohol, gambling, pornography, weapons or tobacco, and the fund is fossil fuel free. There are also restrictions on environmental impact (with particular consideration to the Arctic & ecologically-sensitive operations), animal welfare, human rights and labour standards.
EdenTree Responsible & Sustainable UK Equity
This fund was one of the first ethical funds in existence, having been launched in 1998. EdenTree is a pioneer of responsible investing and ethics sit front and centre of this fund. It has a small and mid-cap bias and all potential investments must pass a rigorous multi-factor screening process against a full range of environmental, social and governance indicators.
*Source: AR6 Climate Change 2021, IPPC 2021
**Source: fund factsheet, July 2021