Climate of opportunity

In December, 187 countries agreed to the “Bali Roadmap”, which will lead to a new climate change agreement replacing the Kyoto Protocol.

In early 2008 oil prices hit $100 (£51) a barrel, major energy supplier NPower increased gas prices by 17.2pc and electricity prices by 12.7pc, and the UK government confirmed nuclear power as its preferred technology to meet future electricity requirements.

The recent Stern Review Report estimated the value of the low carbon energy market would be $500bn (£254bn) by 2050 and the United Nations is anticipating a $100bn (£51bn) demand for projects generating greenhouse gas emissions credits by 2030. Trends, such as the globalisation of trade and commerce and the industrialisation of China, will generate further meaningful demand and place additional stress on the earth’s resources.

These events tell us that a new investment mega trend has arrived. Climate change is affecting how governments frame policy and how consumers behave. Climate change with its vast complexity of accompanying issues is one of the biggest challenges facing businesses today and is likely to be one of the key investment themes for the foreseeable future.

Pension funds will need to determine the impact of climate change on their investment strategy. Identifying and investing in those companies which benefit economically and financially will provide a means to exploit the potential investment opportunity.

The driver for investment returns is a growing realisation that climate change is no longer just a social or political issue but an economic and business issue too. Whereas climate change was once seen by businesses as a source of increasing regulation and compliance expense, it is now seen by visionary companies as an opportunity. Every company has the potential to be affected by climate change. Those companies able to capture the opportunities will achieve a sustainable competitive advantage.

Take for example the increasing demand for sustainability and security of energy supply. This will force major economies to change their approach to energy and move away from a carbon based economy. This will drive the demand for alternative fuels and energy sources. It is not just the energy sector which has the potential to benefit – leading companies in the water, waste and pollution and low carbon sectors also have the potential to outperform.

To capitalise on the investment opportunities there has been a rapid increase in the number of investment products targeting pension funds. These include specialist carbon trading funds, Clean Tech venture capital funds and the emergence of indices which specialise in climate change, such as the HSBC Global Climate Change Benchmark. Forward-thinking fund managers, like Cowen Asset Management Limited, have responded to the needs of pension funds by offering pooled and segregated mandates tailored to their specific climate change requirements.

While there are clear synergies, pension schemes need to be clear that investing to benefit from climate change differs from socially responsible investment. Some companies which will benefit from climate change may fail on their environmental credentials. For example, bio-fuel producers have been criticised for inefficiencies of production and diverting resources away from food production. Schemes will need to be clear how their climate change investment strategy fits with their approach to SRI.

Climate change may be the dominant theme of the 21st century. Pension funds should consider allocating a proportion of their assets to climate change funds as not only could it could enhance their returns, by giving them exposure to what could be the foremost investment theme, but may also contribute to the future security and survival of the planet.
Ann Ellis is director, sales and marketing, at Cowen Asset Management