Seb Beloe – What ‘green’ funds offer, and how productive are they?

Seb Beloe lower resSeb 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.

Brighthelm_mastheadTell us about the approach you take with the WHEB Sustainability Fund – how easy is it to define ‘sustainability’ and what are you looking for in choosing companies to invest in?

Seb Beloe lower resIt 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.

Brighthelm_mastheadIf you’re a cautious investor looking at the long term – what’s the evidence on whether avoiding fossil fuels is possible without adding risk or damaging returns?

Seb Beloe lower resIf 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.

Brighthelm_mastheadAre there any tailored funds or investment vehicles geared to investors who want to divest from fossil fuels. Is this a gap in the market?

Seb Beloe lower resIt 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.

 

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2 Responses to Seb Beloe – What ‘green’ funds offer, and how productive are they?

  1. Geoff Barnard says:

    Very interesting post Seb. The ’stranded assets’ argument hinges on governments waking up to the imperatives of climate change, and taking much firmer action to curb emissions. If they drag their feet on this, and Paris Climate talks in December go nowhere, where does that leave the financial case for divestment? Are early divestors going feel like mugs?

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    • urcearthyear says:

      [From Seb Beloe, via email:] Ultimately, if governments don’t take action on climate change in Paris in December, the oil and gas industry may see some relief, but other sectors will instead become compromised as the impacts of climate change become more pervasive. We are of course already seeing some of these impacts as extreme weather and higher global temperatures affect property values, agricultural productivity and others sectors of the economy.

      Equally, we believe that even in the absence of strong political action on climate change at a global level, you are already seeing significant action regionally to tackle climate change. Moreover, we are rapidly approaching the time when renewable technologies outcompete fossil-based energy systems even without sustained policy support. In the words of the Mark Lewis from the investment analysts Kepler Chevreux, “Even if Paris fails to result in a meaningful global agreement on climate change, we think that investors need to be alive to the risk of stranded assets posed by increasingly competitive renewable-energy technologies.”

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