2 fund ideas for a climate-ready portfolio

There’s no doubt we’re in a climate emergency. This summer has seen disastrous flooding in Pakistan, leaving one third of the country submerged. We saw a ‘megadrought’ in the west of the US – thought to be the driest period in 1,200 years. And we also saw a heatwave in China, dubbed the most severe ever recorded in the world.

These disasters have helped to sharpen focus on the perils of climate change. But they’ve also served to highlight the systemic risks to regional economies and global supply chains, as well as the breadth and depth of impact we might face.

Investors are increasingly concerned with whether their portfolio is on the right side of the green transition. Are they funding the very companies fuelling this climate crisis? Have their investments minimised exposure to climate-related risks? And are they positioned to take advantage of the opportunities emerging from the low carbon economy?

Considering environmental, social and governance (ESG) factors, alongside the usual financial considerations, can be a great way to make sure your investments are aligned to the net-zero transition. But also, that they’re able to capitalise on the opportunities that could arise.

However, lots of fund managers go further.

Here, we look at three ways fund managers can make their portfolios climate ready, and share two fund ideas.

This article isn’t financial advice. If you're not sure if an investment is right for you, ask for financial advice. All investments can fall as well as rise in value, so you could get back less than you invest.

Exclusions

This involves setting minimum standards, so you know you’re not investing in anything that goes against your values. Many exclusions-based funds avoid companies in areas some deem unethical, like tobacco, alcohol and gambling. Companies with involvement in thermal coal, oil sands and arctic drilling are also commonly excluded.

Some funds also avoid companies that could face difficulties adapting to a low-carbon world, like those in the oil & gas sector, unless they have robust transition plans.

Exclusions help to direct investment to the low-carbon section of the economy. This can encourage carbon-intense industries to decarbonise in exchange for added investment and can also be a catalyst for climate innovation.

Engagement

Investing in more carbon-intensive companies and using your power as a shareholder to engage and encourage decarbonisation can sometimes be more impactful than an exclusions-based approach. Companies need to have the ambition to reduce their emissions, a clear transition plan, and be able to show they’re taking steps to improve.

Fund managers often have greater stakes in companies than individual investors, so they can have a bigger say on a range of issues, including strategy, operational performance, risk management and decarbonisation. Fund groups generally produce an engagement report to keep investors up to date on their engagement activities.

Impact

Impact investing is for those who want to be at the forefront of solving the climate crisis. It involves investing in companies that have a measurable positive effect on the environment or society, like those developing low-carbon electricity.

Impact funds measure and report back on the positive impact they make through impact reports, which are generally available on the fund group’s website.

Impact funds focus on a specific part of the market. That means they should generally form a small part of a well-diversified investment portfolio.

Responsible investment in action

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.

BNY Mellon Sustainable Real Return

The team behind this fund invests in a combination of shares, corporate bonds, government bonds, commodities and cash with the aim to make money in a variety of market conditions.

The fund's sustainable 'red lines' mean companies that violate the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption) won’t be considered. Those incompatible with the aim of limiting global warming to 2°C also won’t be considered for the fund.

It also won't invest in companies that make more than 10% of their revenues from tobacco, alcohol, gambling and several other contentious industries.

The team engages with the companies they invest in on a range of ESG issues and report on progress in their Responsible Investment Report (available on the BNY Mellon website).

Alongside exclusions, the team also engages with the companies they invest in. They recently participated in a collaborative engagement to hold Barclays to account for a lack of ambition in its climate transition plan. The team also flagged the bank’s lack of policy around fossil fuel expansion. While the bank has made some improvements following the team’s initial engagement, they believe the current plan still has considerable gaps, so voted against the proposal at the AGM.

Shareholders voting against proposals can not only prevent companies executing their plans and force them to go back to the drawing board, but it can also be a topic of media discussion. This can increase pressure on the company to adopt a responsible course of action.

Investors should note the managers’ flexibility to invest in emerging markets, high-yield bonds and derivatives adds risk.

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FP WHEB Sustainability

WHEB believe that investing in and supporting businesses that have a positive impact on people and planet can help bring about a zero carbon and more sustainable economy.

They invest in companies making a positive impact within nine investment themes: four social (Education, Health, Safety and Wellbeing) and five environmental (Cleaner Energy, Environmental Services, Resource Efficiency, Water Management and Sustainable Transport). Companies that have a negative impact on the environment and society aren’t considered.

Every investment into the fund makes a positive difference. £10,000 invested into the fund throughout 2021 helped:

• Generate 4MWh of renewable energy
• Avoid three tons of carbon dioxide emissions
• Treat 190,000 litres of waste water for reuse
• Provide one day of tertiary education
• Three people receive healthcare treatment, and saved £2,500 of costs through more efficient healthcare systems

This is the only fund managed by the WHEB team, meaning they're solely focused on it. However, the portfolio looks very different to the broader global stock market, so we expect it to perform differently too. The fund's focus towards small and medium-sized companies and flexibility to invest in emerging markets adds risk.

FIND OUT MORE ABOUT FP WHEB SUSTAINABILITY, INCLUDING CHARGES

FP WHEB SUSTAINABILITY KEY INVESTOR INFORMATION