For environmentally conscious investors who want to make a difference with their money, a fund that invests in green and ‘transition’ bonds – which finance changes made by a business to help it meet goals set out in the Paris Agreement – may sound right up their street.
However, it would be reasonable to assume that less agreeable to the same investor would be holding the debt of oil & gas companies. Yet Andrew Lake (pictured) not only does both in his Mirabaud Climate Bond fund, he said that the latter is almost a case of common sense when hoping to achieve the former.
“There’s no point filling the portfolio with technology companies just because they have good carbon scores, because at the end of the day they’ll always have good carbon scores,” he said.
“The issue with transition bonds is you need to be engaging with those companies that are high emitters. And I would include oil & gas within that.
“If they are supplying all of the energy we use and three-quarters of energy is producing all of the greenhouse gases, we need to be engaging with the suppliers of that energy and pushing them into looking at alternative sources and uses.”
The manager said that there has been no push-back from investors in his fund, as they know it makes sense. He pointed to the example of oil major Total, which aims to produce 100GW of renewable energy by 2030, up from 7,000MW last year, as part of its aim of achieving net-zero emissions for all of its businesses by 2050. Meanwhile, BP has committed to divesting $25bn (£18.4bn) of oil & gas assets by 2025.
Lake said this will help his fund’s aim of aiding the long-term transition to a low-carbon economy rather than going for “quick wins”.
“These are companies that have the wherewithal to invest in different sources of energy – they all know that peak oil is going to be reached at some point,” he continued.
“I just think it's very naive to expect us to sit there and say, ‘well, we're looking at reducing the temperature of the world, but we're not going to engage with the highest-emitting companies’.
“It doesn't make any sense, does it? You need to be talking to them and if they don't listen, then obviously you don't invest in them.”
He added that despite the overarching umbrella term ‘oil & gas’, not all companies within the sector were the same.
“ExxonMobil, for example, has been in the press a lot recently with news about board changes and how some of the activist shareholders weren't happy it wasn’t aligning itself with more sustainable processes for the future,” he said.
This also helps to explain why Lake holds the debt of some banks, such as De Volksbank. Unlike transition bonds, which aim to help an entire company work towards the Paris Agreement, the purpose of green bonds is to fund specific environmental projects.
Lake admitted this can lead to some contradictions – for example, Barclays has been a longstanding participant in the green bonds market, but as the biggest funder of fossil-fuel infrastructure in Europe, its investors have come under pressure to divest by environmental groups.
Again though, the manager said it is important to take a pragmatic approach.
“The good thing about all these banks is they're committing all of their forward loan capabilities towards more green and sustainable investing,” he explained.
“But these things take time, and while some of the smaller banks are certainly moving more quickly in that direction, some of the bigger banks are going to take longer, because obviously they have much larger loan books to deal with.”
A major criticism of funds operating in the broader sustainability sector is that they could be fuelling a bubble with the money of rookie investors who – while well meaning – may not be aware of the risks they are taking by focusing on such a narrow area of the market.
However, Lake noted that it will eventually end up as the default mode for investors, fuelled by a changing regulatory environment.
“Fixed income has been a little bit behind the curve in terms of what equities have been doing over the past decade or so, but there’s a lot more interest in it now,” he said.
“Some of that has been due to what's going on with the narrative around climate change, with the US back on board and the fact that you're seeing practical and material effects, with what's been going on in Bangladesh recently, for example. So it has become far more front and centre in terms of investors' minds.”
He added that with everybody coming to the party at the same time, there were got more green bond exchange-traded funds (ETFs) coming out, but that active managers could add more by being a “hybrid green”.
“You’re going to have a lot more variation and an opportunity to pick and choose how you want to invest in this area and I think that’s just going to increase over time.”
Mirabaud Climate Bond was only launched at the end of June, meaning there is not enough of a track record to draw any conclusions about performance.
However, data from FE Analytics shows Andrew Lake has made 195.7% since he started running money, in May 2003, compared with 164.8% from his peer group composite.
Performance of manager vs peer group over career
Source: FE Analytics
The fund has an annual management charge of 0.6%.