Five fund picks to climate-disaster proof your portfolio

Summer 2023 brutally exposed our vulnerability to climate-related disasters. Wildfires raged across Europe, Canada, North Africa, and Asia. Tourists and locals ran for their lives, and charred remains of homes and businesses filled our screens. Climate change, which can seem like a remote future, came up very close, in the present.

Climate-created destruction isn’t the only danger, however. One of the biggest risks to your portfolio comes from measures to avert climate disaster, in ‘stranded assets’. With no place in a net zero carbon world, because of links to fossil fuel extraction and carbon emitting power generation, for example, these assets quickly become liabilities.

Many funds these days take sustainability concerns like these into consideration. But as our awareness for the need for action to meet climate targets increases, a rising number are making environmental protection a core part of their investment process, to protect investors’ wealth, and with it, the wider world.

Here are our five hand-picked Elite Rated funds to climate-disaster proof your portfolio.

LF Montanaro Better World

Manager Mark Rogers limits stranded asset risk by excluding investment in fossil fuels, in extraction or power generation. He also avoids climate risks within the building sector, such as heavy cement-based products and gas boilers, while the airline and trucking sectors are also not for him. Instead, the fund backs the ‘sustainability revolution’ by investing in companies whose products and services help to solve climate change, and that offer attractive returns.

With a small and mid-cap focus, Mark likes profitable, niche market leaders, like water specialists Badger Meter and Xylem, which provide technology that helps safeguard the water cycle and limit flooding*. The manager also invests in areas that focus on efficiency in manufacturing, like Cognex, whose machine ‘seeing’ products increase efficiencies, accuracy, and speed, while lowering cost and waste*. “We are in the midst of a great transformation, the likes of which was last seen during the Industrial Revolution,” he says, “it could not be a more exciting time”.

R&M Global Sustainable Opportunities

“A major source of opportunity is building efficiency,” says manager William Lough. Operating buildings accounts for 30% of global final energy consumption** but this fund owns several smaller companies with great potential because they have ready-made solutions to help bring this down. One such company is US-listed Carlisle Companies, which primarily operates in the roofing and insulation markets for commercial real estate**. Carlisle’s energy-efficient products lower annual greenhouse gas emissions more than 30%**.

William is also taking advantage of a strong push from governments, particularly in Europe, to invest in high-speed passenger rail as an alternative to air travel. Just 6g of CO2 are emitted per passenger per kilometre for high-speed rail, compared to roughly 250g for a domestic flight**. This fund invests in Spanish small cap Talgo, which has a niche leadership position in very high-speed rail, a market which is expected to grow by 9-10% per annum over the next 5 years**.

Rathbone Greenbank Global Sustainability

This fund looks at both renewable based companies and the ‘energy transitioners’ that are helping to decarbonise. In the renewable space, manager David Harrison has long been invested in EDP Renewables, a Portuguese-listed developer and operator of wind and solar assets***. It is also invested in businesses that will help futureproof physical infrastructure, like Schneider Electric, which creates energy storage products that will become increasingly important as we rely more on wind power (given its unpredictability versus carbon heavy energy production)***.

David is also invested in companies helping to improve the re-use of materials, and one area he is seeing progress is in how we re-use consumer plastics. He likes US-based Advanced Drainage Systems, which makes storm water drains from used cola bottles***. “We need to move to more circular thinking when it comes to how we produce, consume and recycle across multiple sectors,” he says, “the ‘circular economy’ will likely play a key role in helping mitigate the effects of climate change”.

Ninety One Global Environment

This strategy is a concentrated, high conviction portfolio of companies the investment team believe are the real leaders of decarbonisation across a range of industries. These companies sit across a wide range of sectors, market capitalisations and geographies, but with much higher growth rates than average.

Decarbonisation is a complex and emerging structural growth area. Through an allocation to this strategy investors can diversify and correct for the underexposure to decarbonisation and at the same time gain exposure to those leading companies with significant potential to benefit from the multi-decade process of transitioning to a low carbon economy. Manager Graeme Baker expects these companies, and so this portfolio, to enjoy a tailwind of structural growth, which will drive higher revenues, margins, and profitability.

JPM Climate Change Solutions

The largest drivers of greenhouse gas emissions include energy in industry, buildings, transportation, and agriculture, and this fund invests in companies providing solutions to reduce emissions in these areas. Co-manager Francesco Conte has seen rapid developments in electrification, for example, critical in transitioning away from traditional fossil fuels. “High voltage cable manufacturers are reporting multi-year order backlogs, while the electric vehicle rollout by all the major car companies has expanded exponentially,” he says.

Incentive programs in both the US and Europe are also spurring investment in areas such as the electric grid and battery manufacturing. The fund is also invested in companies developing sophisticated heating, ventilation, and air-conditioning (HVAC) systems that deliver high-efficiency and low-emission solutions, helping their customers avoid millions of tons of carbon emissions each year****.

*Source: Montanaro, September 2023

**Source: River & Mercantile, September 2023

***Source: Rathbones, September2023

****Source: JP Morgan, September 2023