Prior to the start of the summit, both the Chinese and Indian governments made announcements that they intend to improve energy efficiency, and thus reduce the rate of increase in their carbon emissions. While this is hardly ground breaking, it represents a distinct shift from the previously held position that it was every developing countries right to pollute as they sought to attain a higher standard of living, just as the west has done historically.
Likewise the Obama administration is far keener to engage with the international community and agree a deal than was its predecessor; even though Obama's controversial cap and trade scheme is facing stiff opposition domestically, eventually the world will move to a low carbon economy, which will have significant consequences for investors. Even without a deal on carbon emissions, concerns over energy security are changing the way many countries approach renewable energy; this is most evident in the many parts of the British countryside, now unrecognisable from just a few years ago, that are covered with wind turbines.
In Germany, a feed in tariff for electricity generated by solar panels has seen the take up of solar panels by private households increase massively; a similar scheme is set to start in the UK next year although the small print makes it far less attractive. As low carbon solutions become more sought after there will be a whole host of growth opportunities that are currently only niche markets and are ignored by the mainstream equity funds.
Many ethical and sustainable funds have a head start in these investment opportunities. Seb Beloe, Head of SRI Research at Henderson New Star agrees: "Ethical and SRI investors used to invest in environmental products and technologies as an act of morality. Now that carbon has a price, environmental investing is proving to be an essential commercial skill enabling SRI investors to spot the opportunities – and avoid the pitfalls - more astutely than their mainstream cousins."
One fund looking to take advantage of such opportunities is the Henderson Industries of the Future fund. The fund looks to identify themes that will profit as emerging social and environmental trends develop. These themes include cleaner energy, sustainable transport, and water management as well as healthcare and safety. Once these themes have been identified, the management team look for companies that can provide profitable solutions to the challenges involved, such as solar panel manufacturers JA Solar. The fund also benefits from investing in a diverse number of themes that allows for tactical allocation between them to exploit short-term trends.
While ethical investing is often considered to be at the detriment of performance, the Henderson Industries of the Future fund is top quartile in the IMA Global Growth sector for three year performance.
Performance of fund over 1-yr
Source: Financial Express Analytics
The fund made 6.76 per cent for the three year period to the end of November 2009, compared to a loss of 0.67 per cent for the sector index. The fund is not alone in outperforming its peers while sticking to its principles; the SVM All Europe SRI fund has outperformed the IMA Europe ex UK sector by 22 per cent and the First State Asia Pacific Sustainability fund has outperformed the IMA Asia Pacific ex Japan sector by 11 per cent, both over the same three year period.
Ethical investing is no longer just about making investors feel good about themselves, it is also about significant long-term returns.
With many funds taking a progressive approach to profit from innovative solutions to the world’s sustainability problems, rather than just applying negative screening criteria. These funds could well be investing in the next big thing, a 21st century dot com boom, and through investment in sustainable technologies have tremendous growth potential.
This article first appeared in the Daily Telegraph