A Fair Weather Affair

The subject of global warming used to be taboo among most businesses. Admitting that human-related activities are the principal causes of climate change would eventually mean that the corporate sector would have to bear their share of responsibility for the problem. At that point of time, the idea of 'going green' seemed to indicate additional costs rather than profit opportunities for most businesses. However, regulatory changes and policies initiated by various governments have made businesses sit up and pay more attention to the issue of climate change.

Governments around the world have begun to recognize the negative impact of global warming, and have taken steps to mitigate the effects of global warming. The signing of the Kyoto Protocol in 1997 represents the first international agreement to fight global warming.  In addition, governments have increasingly accepted the need to put a price on the damage carbon emissions inflict on the environment, and to make industries that are responsible for the emissions, pay a price.

Typically, funds that invest into the theme of global climate change, invest in companies that are in the business of mitigating or adapting to climate change. Some of the main categories these funds invest in include clean energy generation, energy efficiency, and energy efficient mobility.

Potential Risks

One potential risk influencing the outlook of green industries is the sudden change or reversal of government policies. Governments have spearheaded developments to tackle the issue of climate change through mandatory restrictions on pollution and subsidies to encourage the wider usage of renewable energy. As such, should governments remove these subsidies, or are slow to penalize the offenders which flout the restrictions, the earnings growth potential of the companies that we have mentioned may take a longer time to be realized.

Another factor to note – although technologies for energy efficiency and alternative energy sources have developed at a relatively rapid pace, the technologies employed by most companies are not yet mature. And there is a distinct possibility that certain technologies under development may never be commercialized. Consequently, the probability these companies will fail is significant, affecting the returns of climate change funds.

The price of oil is also a factor to be considered. The higher prices go, the more sense it makes for businesses to curb carbon emissions. In the long term, oil prices are expected to stay above $50. This means that demand for sources of clean energy as an alternative source of fuel, will remain strong. However, if oil prices crash, the demand for clean energy may decline, leading to a possible fall in the share prices of companies involved in the clean energy sector.

It should be noted that this theme has no comparable benchmark. It will be hard for investors to assess the performance of the funds in this category. In the absence of a comparable benchmark, investors can use the MCI World Index as a reference, but due to the higher risk level of these funds, they should expect returns from these funds to be higher than those delivered by the index.

Thematic Thoughts

More consumers have become increasingly aware of the repercussions of global warming. Governments in developed nations, and increasingly, the developing nations, are also catching on to the idea of moving away from fossil fuels and to renewable fuel sources for their energy needs. As a result, government subsidies are expected to increase in the search and usage of clean renewable fuel sources.

The corporate sector is also becoming increasingly aware of the need to adopt Eco-friendly business models. In all, there is a compelling case for investing in climate change funds. But investors should realize the investment horizon is likely for a longer period of time. Also in comparison to a global equity fund, the risk level is higher.

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