Go green and make money?

Climate change funds have made inroads into Asia. But how many of them have reached Singapore, and how attractive are they?
Jessica Cheam, Straits Times 17 Aug 08;

These days, issues surrounding climate change make the newspapers almost every day.

We hear about them, we know what is happening, and governments around the world are responding in varying degrees by making policy changes and advocating a greener way of life.

In Singapore, an Inter-Ministerial Committee on Sustainable Development was formed recently to study the nation's sustainable development journey and chart its future steps in going green.

But fighting climate change is not a role that falls only on the public sector.

Companies can also play a major role by creating solutions and products that help to increase energy efficiency, or reducing the daily greenhouse gas emissions that are largely blamed by scientists for global warming.

At the individual level, people are equally important - whether in terms of practising a more sustainable way of life, or demanding goods and services that are environmentally responsible.

And as investors, they can do even more.

The good news is that people can help to save the earth while making money from it too.

With the increased awareness of climate change issues globally, many banks and fund managers have put together climate change funds from the growing number of companies that are trying to tackle global warming. These funds give investors a chance to turn a threat into a buying opportunity.

Some big-name companies that investors can buy into are Norwegian solar firm Renewable Energy Corp (REC), Danish wind turbine maker Vestas Wind Systems and United States-based Waste Management, just to name a few.

Some of these companies have their futures closely tied to Singapore. REC, for example, has picked Tuas for its $6 billion giant manufacturing plant, with construction set to begin next month, and Vestas has announced it will build a $500 million research and development centre here.

Leading US research house Clean Edge has reported that revenues in the clean energy industry hit US$55 billion in 2006, with a projection of US$226 billion (S$318 billion) by 2016.

As a result, climate change has emerged as an investment theme that is growing in popularity and attractiveness.


So what are climate change funds?

Climate change funds work like typical funds, but essentially focus on investing in companies from climate change and environment-related industries such as renewable or low carbon energy, energy efficiency, and waste, water and pollution management.

They are also considered part of a larger category of socially responsible investment funds, which adopt a wider social and environmental focus in their investing strategies.

Such funds were previously considered niche products that did not give high returns, but this perception has changed tremendously in recent times.

When he was in town last year, former US vice-president Al Gore debunked the misconception that good returns and ethical values were irreconcilable.

In a closed-door session with ABN Amro's clients, he noted that investors are becoming increasingly aware - as they need to be - that social responsibility and investment returns are not mutually exclusive.

He added that, as investors, even individuals can contribute to the global fight against climate change by putting their dollar where it matters.


What are the pros and cons?

Mr Farley Thomas, global head for wholesale distribution at HSBC Global Asset Management, estimates that there are 40 environment-related funds worldwide. About 15 to 20 of the funds are located in Asia, with US$2 billion in combined assets.

The world is seeing more mainstream action from governments and companies, said Mr Thomas.

'This is a worldwide phenomenon. We definitely see climate change as a big investment theme in the future,' he added.

Investors can be assured of the relevance and performance of such funds over the long term.

Recently launched climate change and environmental indexes show such funds outperforming their key equity counterparts.

These benchmark indexes reflect and track the stock market performance of the companies that are best-placed to profit from the challenges and opportunities presented by climate change.

Last year, ABN Amro launched its Climate Change and Environment Index (CCEI), which tracks the performance of stocks directly involved in business activities related to climate change and environmental degradation. Since its launch in February last year, the CCEI has grown by 10.3 per cent - a significant feat, considering the current woes weighing down financial markets. In May, before sentiment soured sharply, growth reached 21.6 per cent.

Since February last year, the CCEI has outperformed key equity indexes such as the Standard & Poor's 500 Index (down 11.07%) and the MSCI World index (down 11.39%).

ABN Amro's head of Asian product development, Mr Samuel Ng, noted that during market downtrends, stocks and segments represented by the CCEI have proved to be more defensive than the overall equity markets.

The HSBC Global Climate Change Benchmark Index, developed by the bank's Global Research team, is a global reference index that, based on data backtested to 2004, has outperformed the MSCI World index by around 70 per cent.

The flip side to such funds, say financial consultants, is that they are still not hugely popular. As a result, they are too thinly traded and show little fluctuation during market boom or bust periods.

While green funds have garnered huge interest in the West, they are a relatively new investment theme in Asia, said OCBC Bank's vice-president of group wealth management, Mr Vasu Menon.

'At this juncture, most Asian investors are concerned with generating positive returns, irrespective of whether a fund invests in companies that are environmentally friendly or socially responsible,' he said.

However, this will change as Asian governments and companies start to place greater emphasis on safeguarding the environment, he added.

Deutsche Bank investment specialist Bill Barbour added: 'Interest has picked up in the past few years as topics linked to climate change gained prominence on the agendas of policymakers and businesses globally.'

As a result, the bank remains positive about the market outlook for green funds over the long term.


Are these funds in Singapore?

Investors looking to cash in on climate change opportunities must be asking, where are these funds, and what's the best way to invest in them?

In Singapore, unfortunately, such funds are still in their infancy. The local banks - DBS, United Overseas Bank (UOB) and OCBC - do not offer their own climate change related products.

This is probably because local banks might not have the resources or expertise required to manage these funds, which are quite large in scale, said Mr Albert Tse, Schroder Investment Management's head of retail distribution in Singapore.

There are currently two local climate change funds: the DWS Global Climate Change Fund from Deutsche Bank and the Schroder ISF Global Climate Change Equity Fund.

Although local banks do not have their own products, investors can still get access to such funds through them.

OCBC, for example, is a distributor of the DWS Global Climate Change Fund and UOB distributes Schroder's equivalent.

Both funds are also available through other distributors such as Citibank, financial advisers and even online via Fundsupermart.com.

HSBC Bank also has a global climate change investment fund, but the fund is currently domiciled in Luxembourg and available only to the bank's accredited clients in Singapore.

ABN Amro offers a different product but with the same theme. Investors can buy certificates of its recently launched Climate Change and Environment Index, available on the Singapore Exchange.

The certificates offer investors exposure to an initial composition of 30 stocks in eight different sectors engaged in activities such as ethanol, geothermal power and other alternative fuels, hydro-electric power, platinum and palladium mining, solar power, water and waste management, and wind power.

In Asia, fund flows into eco-market related investments over the past two years have been encouraging, said ABN Amro's Mr Ng.

Last year, the bank received 180 million euros (S$378 million) in subscriptions from Asia - about 5 per cent more than in 2006.


What about performance?

In terms of performance, the DWS Global Climate Change Fund had outdone the

MSCI World index by 4.3 per cent, not including management fees, over the past six months, as at the end of last month.

The recent dip in its performance is in line with the general market situation, said Deutsche's Mr Barbour.

Schroder's Global Climate Change fund celebrated its first anniversary last month with a return of 3.6 per cent versus minus 10.7 per cent for the MSCI World index. It has outperformed the index by 14.3 per cent since its launch last year.

To date, the fund has returned around minus 8.9 per cent. While this is negative in absolute terms, the fund has outperformed global equity markets, said Mr Tse.

He explained that the fund's stocks are driven more by regulatory changes, unlike stocks in conventional global equity funds, whose drivers are more cyclical or economic in nature.

Clearly, all funds have deteriorated in performance because of the credit crisis, added HSBC's Mr Thomas. Generally, the cross-border mutual fund universe has been affected, with investors moving to lower-risk products.

'But we're not bothered. We're now focusing on making our core flagship strategy available in as many markets as possible,' said Mr Thomas.

In short, climate change funds look like they are here to stay.

As an investor, you can vote with your dollar if you want to be part of this climate change growth story.