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  • 4 November 2018

Finite resources, and the need to consider the impact of the climate in fulfilling needs from water, food and energy supply, have opened opportunities for companies to offer alternative or sustainable solutions.

Investing based on climate or environmental concerns is a growing space, and typically factored in the broader sphere of sustainable investments.

Environmental and climate concerns

According to a report by the United Nations, global water demand is expected to increase by nearly one-third by 2050<sup>1</sup>. Alongside this, the global population is tipped to be 9.8 billion people, all needing food, shelter and water, to be supplied from the restricted resources of earth<sup>2</sup>. 

The challenges of supply and efficient use of the resources we have requires different ways of thinking and alternative approaches to how we use and manage the resources available to us. In theory, investing in this area could cover any activity to mitigate the impact of climate and human damage; works to prevent that impact, substitutes for things considered to cause or magnify environmental damage and promote more sustainable and efficient use of our resources. 

The environmental and climate theme incorporates everything from renewable and alternative energy sources, energy efficiency, “smart” power grids, recycling, biofuels, water purification technology, anti-pollution technology, environmental remediation and rehabilitation, new materials (particularly for batteries) and “carbon trading” markets (more specifically, “right-to-emit-carbon-dioxide” trading markets.)

Finding investments in this area

On the Australian Stock Exchange (ASX), the most prominent stocks to claim climate credentials are the alternative energy suppliers. Of these, the purest-play exposure is Infigen Energy (IFN), which owns and operates six wind farms and one solar farm in Australia, with a total operating capacity of 557 megawatts (MW). It sells this electricity, and also sells large-scale generation certificates (LGCs) that it receives for generating “eligible” renewable electricity – it sells these LGCs to electricity retailers, who, as “liable entities” under the Renewable Energy Target (RET) scheme, are obligated to buy an LGC for every MWhr of “ineligible” (that is, fossil-fuel-derived) electricity they buy.

Major Australian energy suppliers AGL Energy (AGL) and Origin Energy (ORG) are also renewable energy generators, but within broader portfolios that at this stage include fossil fuels. Currently only 10% of ORG’s energy generation is renewable, but it wants to triple that by 2020, with goals to produce 1200 megawatts from wind, solar and hydro. AGL has 9% of its generation coming from renewables at present (coal provides 84%), but has committed to exiting its coal-fired generation by 2048, and replace it by a mix of improved efficiency, renewables and demand response. 

New Zealand renewable energy providers Mercury NZ (MCY), Meridian Energy (MEZ) and Tilt Renewables (TLT) are also listed on the ASX: MCY and MEZ are both profitable dividend-payers. MCY operates nine hydro stations, five geothermal power stations and a multi-unit gas-fired power station; MEZ operates seven hydro stations and ten wind farms in New Zealand and Australia. TLT has three operating wind farms in New Zealand and four in Australia, with a pipeline of wind and solar farms in development in both countries. These are companies to watch, as the renewable energy market develops in our region.

Taking a fund-based approach

For investors concerned about the risks involved in investing in single companies, accessing sustainable investments through managed funds and exchange-traded funds (ETFs) can provide an alternative. 

We refer to these as “sustainability themed investments”, which encompass any managed investment that takes into account environmental considerations, governance standards (how a company is run) and social factors (such as product safety or labour standards) in their approach. These are known as environmental, social and governance (ESG) factors.

Sustainability themed investments can also involve a negative screen where it excludes certain industries or sectors due to concerns about ethical, environmental or social issues or positive screens where particular sectors or issues are targeted for inclusion, for example focusing purely on renewable energy companies. In some cases, sustainable investments may use a combination of ESG factors, positive and negative screens as part of investing decisions. 

Although social and corporate-governance factors might not interest an investor motivated more by environmental or climate concerns, using a sustainable investment strategy may help identify the types of investments such an investor would wish to support.

Investing through ETFs in this space is still a growing area, the US offer a number of climate specific ETFs which may provide an indication of how the Australian market could develop in the future. Some examples include the iShares Global Clean Tech ETF (Nasdaq; ICLN), the Change Finance U.S. Large Cap Fossil Fuel Free ETF (NYSE Arca; CHGX), the First Trust Global Wind Energy ETF (NYSE Arca; FAN), the Guggenheim Solar ETF (NYSE; TAN: it is the only pure-play US solar ETF), PowerShares WilderHill Clean Energy ETF (NYSE Arca; PBW) or the First Trust NASDAQ Clean Edge Green Energy Fund (Nasdaq; QCLN). There are even specialist yieldco ETFs. 

Climate and environmental investing is an interesting and growing sphere, but as always, investors should be careful to ensure any selected investments match with their overall investment strategy and goals.

1. The United Nations World Water Development Report 2018 – Nature-based solution for water
2. United Nations, World population projected to reach 9.8 billion in 2050, and 11.2 billion in 2100, 21 June 2017.

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