Five funds tackling climate change ahead of COP28

Square Mile's Louis Selby identifies five strategies channelling capital towards businesses that provide solutions to climate change

2023 looks set to be another record breaking year for global temperatures, playing witness to numerous severe weather events.

These bring with them tragic loss of human life and provide very tangible evidence of the impact climate change is having on the planet and society.

Against this backdrop, leaders from around the world, scientists and lobbyists will gather at COP28 later this month to recommit to earlier promises to act against climate change. Critics of this conference frequently point to the fact that once the photoshoots have been completed and the bunting removed, aspirational commitments are quickly forgotten as domestic political expediency once again drives policy. 

Irrespective of such governmental short-fallings, individuals can play an important role in mitigating the climate crisis through their choice in investments. There are increasing numbers of compelling funds available to investors and fund selectors which seek to have a positive impact on the environment by channelling capital toward businesses that provide solutions to climate change and away from those industries that are most damaging to the environment.

Managed by Craig Cameron, Tina Sadler, and Herbert J Arnett, the Templeton Global Climate Change fund is a high-conviction portfolio of around 40 companies that provide solutions to the climate crisis. Investee companies will align with three goals, namely: the reduction of greenhouse gas emissions; a commitment to aligning their own self-decarbonisation trajectory with the 1.5 degree scenario and avoiding fossil fuel producers potentially exposed to the risk of stranded assets

Themes running through the fund include renewable energy, sustainable transportation, sustainable agriculture, and water and waste management. Importantly, the investment team demonstrates the impact of their portfolio in a quarterly Impact Report, which includes details on theme alignment, carbon avoided, and illustrative case studies.

Square Mile’s 3D Investing interrogates fund holdings to determine their alignment with the 3D Framework of ‘Do Good’, ‘Avoid Doing Harm’ and ‘Lead Change’ and the Templeton Global Climate Change fund scored an impressive 57% alignment to 3D solutions categories. It is dominated by an Environmental Solutions theme, broken down into renewable energy (19%), enabling infrastructure (17%), and resource efficiency (11%). This analysis supports the managers’ claim to a strong alignment to countering climate change through their portfolio.

The Calvert Sustainable Global Green Bond fund seeks to deliver a total return, while supporting positive environmental and social impacts and outcomes. It is managed by Leon Grenyer, Brian Ellis, Vishal Khanduja and Dipen Patel, with the support of the wider Morgan Stanley broad markets fixed income team and the Calvert fixed income ESG strategy & research team. Alongside green bonds, the managers invest in traditional bonds that provide material positive outcomes using their proprietary Sustainable Bond Evaluation framework to analyse each investment.  

Holdings also must be in line with the Calvert Principles of Responsible Investment, which groups investable companies into relevant peer groups with comparable ESG factors. These are evaluated in turn against a range of ESG issues and themes which include climate and energy, management of environmental risks, biodiversity, valuing human capital and labour, and social impacts of the supply chain.

The fund demonstrates an impressive alignment to companies that 3D classifies as offering solutions to environmental and/or social challenges. A very high percentage of the fund’s assets are allocated to Environmental (c.45%), Social (c.9%) and Sustainability-related Fixed Income (c.45%) solutions with Environmental Solutions comprising the most significant portion of the fund’s assets.

The managers of the Pictet Global Environmental Opportunities fund seek to allocate capital to businesses that contribute to alleviating nine environmental concerns highlighted within the 2009 study, Planetary Boundaries Framework. Among these are climate change, stratospheric ozone depletion, freshwater use, biodiversity, atmospheric aerosol loading and chemical pollution.

The managers believe businesses aligned with these themes will benefit from increased levels of capital allocated to them over time. The process underlying the fund excludes companies whose footprint falls outside of any of the nine areas of the planetary boundaries and then identifies firms that alleviate pressure on at least one of the nine.  The final portfolio is very bottom up in its construction, consisting of approximately 50 of the stocks deemed most attractive within the parameters of the investment process.

Given that the managers aim to invest their fund into companies that are delivering positive impact in the face of challenges related to overconsumption of natural resources and excessive pollution, the fund has very high exposure to companies classified as offering solutions to these concerns.

The Impax Environmental Leaders fund is invested in global equities that the managers believe are contributing to developing resource efficiency and proliferating environmentally friendly practices into the wider market, thereby benefitting from regulatory and consumption tailwinds. Portfolio holdings must derive a minimum of 20% of their revenue from one of six themes according to the solution they deliver, evaluated by Impax’s internal team of ESG analysts, and mapped back to the United Nations Sustainable Development Goals (SDGs). These themes include new energy, clean and efficiency transport, water and smart environment solutions. In addition, the managers apply a series of robust exclusions, precluding investment in controversial sectors and industries. The fund’s positive impact is evidenced in a detailed report which includes strategy briefs, revenue mapping to SDG-aligned solutions, footprint and outcome data and case studies.

The fund has achieved an impressive 79% exposure to companies which 3D classifies as offering a solution to environmental and/or social challenges, through its new energy, clean and efficient transport, water, and smart environment solutions. Meanwhile, resource efficiency and enabling infrastructure make up a combined 45% exposure.

Alexis Deladerrière, the manager of the Goldman Sachs Global Environmental Impact Equity fund, is guided by the mantra of ‘do well by doing good’. He has identified five key environmental themes which he believes will benefit from the long-term tailwinds linked to transitioning to a more sustainable world.

Underpinning this belief is the recognition that we are amid a climate emergency and that to meet the Paris Agreement goals there needs to be at least a 50% reduction in emissions by 2030. The requires a truly holistic approach to impact investing, based on the view that the causes of global warming are not isolated to specific activities, but instead range from agriculture, forestry and land use, all the way to fuel combustion and energy use in residential buildings. Goldman Sachs Global Environmental Impact Equity fund’s name rings true in its exposure to companies which 3D classifies as offering a solution to an environmental challenge.

The fund has approximately 98% exposure to Environmental Solutions, with the most prominent categories being Resource Efficiency (c.27%), Renewable Energy (c.21%) and Circular Economy (c.14%). This exposure is strongly aligned to the fund’s sustainable investment themes of resource efficiency, clean energy and circular eonomy.