Investing in Ecology is not only a smart movement for the investors but essentially it a good movement for the environment. In numbers, the sector looks promising for the rest of the 2021, and sectors like energy efficiency, especially industrial efficiency had a good performance recently. The support from the governments and the Net Zero goal by 2050 have also created a good space for investors and loads of opportunities to think about investing in Ecology.
We have chosen some of the best funds for investing in Ecology, from Pictet, Schroders and Erste, and have requested their Portfolio Managers to take us through the strategy, and to give us some insights from the sector.
Pictet – Global Environmental Opportunities
Luciano Diana, Global Environmental Opportunities portfolio manager at Pictet Asset Management
Promising prospects for global environmental thematic investments
The outlook for global environmental thematic investments look promising for the remainder of 2021. Governments in Europe, China, and the US – the three main economic blocs – are aligned in support of technologies aimed at making their economies more efficient, less resource-intensive and more sustainable.
The EU has passed measures that put the bloc on track for the 2030 target of reducing greenhouse gases by 55% compared to 1990 levels. In addition and more important, companies continue to invest in innovation, reducing costs in many disruptive environmental technologies. Indeed, the electrification and digitization of entire sectors of the economy, such as transportation, manufacturing, buildings and construction, must accelerate as the global economy reopens.
This benefits solution providers in renewable energy, energy efficiency and dematerialized economy(where two-thirds are software companies and another third semiconductor equipment manufacturers). In addition, companies that contribute to a cleaner environment are likely to see strong demand, as they reduce negative health effects, help prevent future diseases and rebalance the relationship between humans and nature.
The segment that has come to perform best recently is energy efficiency, especially industrial efficiency, in part because of a higher level of post-Covid automation. Pollution control has also excelled with spending on environmental infrastructure, while dematerialized economy shows impressive results in computer simulation applications. The renewable energy segment has performed worse in the face of concerns about rising commodity prices. On the other hand, extreme weather events should translate into more business for certain water technology companies.
In the distribution of assets we start from 40,000 quoted companies globally. We first see if they operate within the “safe operating space” of the nine earth boundaries, following the scientific framework of Stockholm Resilience Centre. This is a complete environmental footprint of the life cycle of each product or service, which includes, in addition to CO2 emissions, acidification, chemical pollution, land use changes, ozone depletion, atmospheric aerosol, changes in the nitrogen cycle, loss of biodiversity, changes in the phosphorus cycle and depletion of freshwater supplies. In a second step we identify those that show at least 20% of gross revenue or profits in environmental solutions.
In the selection of Equities we favor secular income growth, a high return on invested capital and the integration of Environmental, social and governance factors. Finally, the portfolio is concentrated in about 50 securities of higher conviction. We also evaluate the impact of companies’ products and services above the average of MSCI ACWI index in terms of United Nations Sustainable Development Goals. The largest exposure is to “Responsible consumption and production”, “Industry, innovation and infrastructure”, “Clean water and sanitation” and “Climate action”.
Currently the weight of North America is about 65%, high historically. Exposure to emerging markets, where most environmental problems are, is mostly indirect.
Schroder International Selection Fund Global Climate Change
Simon Webber, Manager of Schroder ISF Global Climate Change Equity
Clean energy and government support give impetus to the fight against climate change. Schroder ISF Global Climate Change Equity aims to achieve capital and income growth by investing around climate change. To this end, the fund, which falls under Article 8 of the SFDR, identifies those stocks of global companies that will benefit from efforts to reduce the effects of climate change.
The way we allocate capital determines not only the financial benefits we can achieve, but also the kind of impact we make on the world. These companies can have a positive impact on the environment. What’s more, their business models are more robust and better positioned to support long-term growth. So, increasingly, climate change investing is more and more present in portfolios.
In this regard, it is worth noting that the momentum of the transition to a low-carbon economy is accelerating rapidly. The most important driver has been the greatly improved competitiveness of clean technologies to the point where they require little or no subsidy to compete with fossil fuel technologies. In addition, there is also a push for government support, led by the European Union with very ambitious emission reduction targets for 2030, and the EU Green Deal that channels at least a quarter of the EUR 750 billion recovery package into decarbonisation initiatives.
Despite all these efforts, we still have a long way to go. Earlier this year, Schroders committed to a science-based target and we are working out the details. We have also joined other asset managers in urging political leaders to raise their climate ambitions.
More importantly, we are defining the path we will take to get there and making sure we are as prepared as possible to manage the risks and take advantage of the opportunities facing the investments we manage for our clients.
ERSTE WWF Stock Environment
Clemens Klein, Portfolio Manager ERSTE WWF Stock Environment
Will Europe become the first climate-neutral continent? The consequences of climate change, which have just recently been brought home to us in the form of devastating floods and destructive tornadoes, even in our latitudes, show once again that it is high time to rethink. Green technologies that counteract such catastrophes will ensure that no stone is left unturned in the economy and society for many years to come.
Our fund ERSTE WWF STOCK ENVIRONMENT focuses on companies that have a positive impact on the environment and provides solutions to combat climate change towards a sustainable economy. The focus is on renewable energy, energy efficiency, water and waste & recycling.
Political support and market update
The rethinking process among organizations and companies has long since begun. The political picture also continues to support environmental technologies. Through the EU’s green plan (Green Deal), global financial flows are increasingly being steered towards green and sustainable investments. By 2050, Europe is to be made the first climate-neutral continent. However, major countries such as the USA, Japan and China have also set ambitious targets for reducing greenhouse gas emissions by 2030.
With the postponed COP26 conference in Glasgow still a few months away, we need to look east for the largest recent change: the launch of China’s national emission trading scheme (ETS) on July 15th. The ETS will initially cover an approximate 4 billion tC02e or 40% of Chinese and a seventh of global emissions. Participants are mainly from the energy/ utilities sector but are likely to expand as China moves towards its 2030 peak emissions and 2060 carbon neutrality targets. While the scheme started a relatively low carbon price of USO 7.41 per ton (vs. EUR 54/tC02e ln Europe). It was up 6.5% after it’s first day of trading.
Renewable energies with huge growth potential
Apart from political support, it is primarily economic reasons that support the positive long-term prospects of the fund. In many parts of the world, wind and solar energy are now the cheapest forms of power generation, eliminating the need for subsidies, which is very positive overall. The significant drop in battery prices in recent years not only helps e-mobility to achieve a breakthrough but will in the foreseeable future lead to solar or wind energy, including storage, being the cheapest form of electricity generation. This will inevitably lead to a further acceleration in demand. (However, other areas of the fund such as recycling or water are also becoming increasingly important topics in many parts of the world and should therefore show clearly above-average growth rates for years to come.)
After taking some profits at the start of the year we have recently started to add to our Solar exposure as we believe that the sell-off was excessive. We have added Shoals, Solaredge, Sunrun and Sunnova which have all performed nicely. Despite short term headwinds like sharply rising input costs, supply chain bottlenecks, the ongoing Net-Metering discussion in California and the US ban on certain Chinese Solar imports we are convinced of those companies’ long-term prospects.
In it’s latest report the International Energy Agency (IEA) stated that “to reach the goal of net zero emissions by 2050 the world has to quadruple annual additions of wind and solar resources from the already record levels set in 2020. For solar, this is equivalent to installing the world’s current largest solar par every day from now until 2030”, which shows the enormous growth potential for involved companies going forward.
Celebrating its 20th birthday
As mentioned above, the environmental technologies sector shows great growth potential for the next few years. Many companies in this segment are only at the beginning of a promising development. ERSTE WWF STOCK ENVIRONMENT, which is celebrating its 20th birthday these days and was pioneering in Austria when it was introduced, offers the opportunity to invest in promising shares of companies in the environmental technology sector.
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