Seb Beloe is the Head of Research at WHEB Asset Management. WHEB is a specialist fund management business that runs a global equities strategy focused entirely on nine sustainable investment themes including environmental themes such as cleaner energy, sustainable transport and water management and social themes such as education and health.
It is clear that the world faces a series of pressing environmental and demographic challenges. Climate change sits alongside wider resource scarcity, urban air pollution, urbanisation, obesity and aging as challenges to conventional business and investment practices. While these issues, and the economic and social responses to them will disrupt traditional approaches to commerce and investment, solutions already exist and are being deployed at scale.
Businesses providing these solutions will grow as individuals, governments, communities and corporates increasingly recognise the need to address these challenges. WHEB seeks to support and benefit from the growth in these businesses by investing in them.
Specifically we invest in companies with significant exposure to five environmental themes (cleaner energy, environmental services, resource efficiency, sustainable transport and water management) and four social themes (education, health, safety and well-being). Together these themes are enjoying growth rates significantly in excess of the wider market as societies around the world demand cleaner and healthier communities in which to live.
If the global financial crisis taught us anything, it is that markets are very poor at managing long-term risks. Many financial actors knew of the risks of complex mortgage-backed securitised products, but in the words of Chuck Prince, the former Chairman of Citigroup, “As long as the music is playing, you’ve got to get up and dance.”
Climate change, while a very different type of problem, faces similar dynamics. Few doubt the need to use fossil fuels in the short term, but the science of climate change is clear that these fuels will need to be phased-out increasingly rapidly over the medium-term. Jumping off the fossil fuel band-wagon before carbon assets become impaired, will be very difficult to do, just as it was difficult to ‘stop dancing’ before the credit crunch. The cautious investor will divest sooner rather than later and avoid the risk of being left with these stranded carbon assets.
In the short-term this may mean that cautious investors have to give up on some returns. However, at least in recent years even this has not been the case. Several studies backtesting fossil free indexes against their fossil-fuelled counterparts have found that they have either outperformed or performed broadly in-line with the main index. [For example see: ‘The Risks and Returns of Fossil Free Investing’ (Sustainable Insight Capital management), ‘Beyond Fossil Fuels: The Investment Case for Fossil Fuel Divestment’ (Impax Asset Management) and FTSE Developed ex-Fossil Fuel Index Series (FTSE)] This includes the MSCI World, the FTSE100 and the S&P500 over multiple time periods. Of course this may reverse in the short-term, but ultimately the science is clear- fossil fuels will need to be phased out if the world is to avoid major climate change and the catastrophic impact that this will have on economies and societies around the world.
It is still difficult if not impossible to build a fully diversified portfolio of investments across all asset classes without investing in fossil fuel companies or projects. Some asset classes are reasonably well-served with fossil fuel free product. There are for example several fossil free global equity funds (such as the FP WHEB Sustainability Fund). Other parts of the market however are only available to larger investors. For example, there is a reasonable choice of private equity and infrastructure products that are fossil fuel free (including WHEB products). However many of these products are only available to larger institutional investors. This is also true of fossil fuel free index trackers which are frustratingly and puzzlingly not yet available to retail investors. Fossil free hedge funds are almost non-existent however.
So for major equity and bond products there are options available. Other parts of the market are still developing with greater choice available for larger investors. The picture is though improving every year with new products and new approaches being develop all the time.
Do you agree with Seb? Use the comment box below …
(All comments will be subject to moderation before being published; long comments may be shortened)