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Investing in a climate change strategy

Since 1995, assets in sustainable and responsible investments have grown 18-fold to more than US$11 trillion.

THE United Nations released a sobering report on climate change this month, stating that the Earth is warming faster than even scientists thought and that without far-reaching action, the planet is likely to warm to a dangerous level by 2040.

Scientists have been sounding the alarm about global warming for decades, but the report hit a chord: Time is running out before serious and possibly irreversible effects are felt.

Debate on the causes and effects will continue, but money managers say this stake in the ground gives investors a concrete guide to understand how climate change will affect their investments.

"When you lay out what the challenge is, you're in a better position to attack it," said Stephen Liberatore, a fixed-income portfolio manager at Nuveen who manages US$9 billion with an environmental, social and governance mandate.

"A report like that lays out the solutions," he said. "If we need US$2 trillion to invest to save the planet, here's what we need to do. I think it allows people to see what they need to do to accomplish their goals."

It has been getting easier for individuals to invest with climate change as a focus. Since 1995, assets in sustainable and responsible investments have grown 18-fold to more than US$11 trillion, according to US SIF, a membership organisation of sustainable investors.

There are two main approaches to creating a climate change investment strategy. One is investing in alternative energy. This can be done in a variety of areas, including solar, wind or geothermal production and distribution, or companies that make the infrastructure, like battery cells that power electric cars.

The other way is what some call climate-proofing a portfolio. The premise is that a warmer Earth will create economic disruption and that companies need to prepare for this.

Walmart, for example, has worked to make its more than 5,000 stores more environmentally responsible, from demanding that suppliers use less packaging to turning off lights at night. These are small steps that, given the retailer's size, have saved it billions of dollars and reduced waste. This week, Walmart signed a deal to increase the use of solar panels on its stores.

In another example, Toyota, the maker of the Prius, has sold bonds whose proceeds were used to promote its hybrid technology.

Here are three ways to consider climate change as a criterion for making investments:

Tap public markets for green investing

Investing in publicly traded equity and debt is an easy way to express a view on climate change. And their availability, along with the increasing number and size of mutual funds with a focus on the environment, offer plenty of choices.

Yet, these investments, like any other, carry risk. "You still have to do your homework," said Lloyd Kurtz, head of social impact investing for Wells Fargo Private Bank. "If you buy an expensive stock with bad fundamentals, it could be green but it's still going to perform badly."

That was the case with many early solar investments and the selections that early green energy funds made, Mr Kurtz said. But he said the case for renewable energy had been bolstered by companies, such as Apple and Google, that adopted these sources to power their operations in the United States.

The debt market has developed to a level that there are offerings for retail investors.

Louise Herrle, managing director and head of socially responsible investing at Incapital, which underwrites bond offerings, said she had seen an increased interest from baby boomers who want a portfolio aligned with their values. This could mean offerings from the World Bank to fund water projects or bonds such as the one from Toyota.

"Retail is going to drive this," she said. "They want to put their money where their mouth is. People are talking about the financial return and the social return."

Seek companies expanding responsible business

Constructing sustainable buildings is a major source of green investment, as are wind farms and solar arrays. But there are plenty of companies in a middle ground, working to retrofit buildings or using alternative energy to add to existing power sources.

Kevin Walenta, who manages Fidelity's select environment and alternative energy portfolio, said he followed companies that saved energy in more traditional ways. These companies, such as Ingersoll Rand, Lennox International, Honeywell and Johnson Controls, install efficient lighting or heating and cooling systems in commercial buildings. The result is significantly less energy consumption, higher green ratings for a building and returns in just two or three years.

Mr Walenta said he looked at both parts of investing - the environmental impact and the total return.

"I am looking for the companies that are driving environmental change but have a durable business model, good returns, positive cash flow and strong balance sheets," he said. "Within the context of environmental change, I want them to drive profits over long periods of time."

Such strategies aim to rebut the common belief that investing with an environmental focus reduces returns. There are examples of inferior investments made to achieve a social good, but there are companies focused on green initiatives that are profitable and may be more so as climate change intensifies.

"There are three main misperceptions that I talk to every investor about: You give up performance to be responsible investors, responsible investing isn't mainstream, and you can't make an impact in public market securities," Mr Liberatore said.

Our investors are "looking for return potential and impact", he added.

Look to Asia for a big impact

Its decision to pull out of the Paris climate agreement was big news, but the United States' pollution of the environment has stayed roughly consistent over the past 25 years, and Europe has decreased its carbon levels. The big polluters have been countries in Asia - China in particular.

Vivek Tanneeru, portfolio manager of the Matthews Asia ESG Fund, said that 85 per cent of the growth in emissions had happened in Asia, and that China had accounted for 61 per cent of that growth.

On the positive side, he said, the solar panels that China installed in the first nine months of 2017 exceeded all the solar panels in the United States up to 2016.

"It tells you the Chinese government has the political will to do this," Mr Tanneeru said. "Anyone who is serious about addressing climate change needs to begin in Asia to have any global impact."

His investment focus is not in renewable energy. That industry, and solar panels in particular, has not had a great track record over the past decade, largely because of government support and low barriers to entry, which led to oversupply.

Mr Tanneeru said he was focused more on battery technology, which is produced almost entirely in Asia. Tesla uses Panasonic battery cells, BMW's i3 runs on Samsung technology, and GM uses batteries from LG Chemical. It's also an area, he noted, that has high barriers to entry.NYTIMES

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