How Can You Invest in Climate Funds?
Uncover what climate solutions can fit into your portfolio.
The upcoming COP26 meetings in Glasgow will cast a spotlight on how the world is addressing the climate crisis. As part of an all-hands-on-deck global effort to achieve net zero greenhouse gas emissions as quickly as possible, as much as $173 trillion of investment capital needs to be directed into climate solutions.
Mark Carney, special UN envoy for climate action and former Bank of England governor, calls the move to net zero the “greatest commercial opportunity of our time.” Investors also need to take steps to protect their portfolios from climate risks: Some investments will be disadvantaged in the transition to net zero, while others will find themselves vulnerable to physical risks from extreme events caused by climate change. By some estimates, the global economy could be as much as 14%, or $23 trillion, smaller in 2050 than it otherwise would be if climate change continues unabated.
Fund investors have a burgeoning number of choices to invest in climate-change-related opportunities, as well as to mitigate climate risk in their portfolios. In this article, portions of which were published earlier this year, we sort out the climate-focused fund landscape to help investors navigate what can be a confusing mix of offerings as they seek to decarbonize their investments and help finance the transition to a low-carbon economy.
A record number of climate-aware funds have launched for the year to date through September. These 186 new funds bring the total number of climate funds to 636 globally. Assets in climate funds have increased by 50% so far in 2021 to reach $275 billion.
Unsurprisingly given its greater commitment to a climate agenda, Europe registered the highest growth, with 112 new climate fund launches. Europe remains by far the largest and most diverse universe, with a total of 434 climate products representing $216 billion in assets.
The United States remains the second-largest climate fund market, with close to $29 billion in assets and 19 new climate fund launches this year. However, China is catching up, having seen 20 new climate products hit the shelves this year and the overall market accounting for $26.1 billion.
While our focus here is on climate-aware funds--those that specifically focus on climate risks and opportunities--keep in mind that they comprise a subset of the even larger sustainable funds universe, which is also experiencing rapid growth globally.
Virtually all diversified sustainable funds are also climate-aware, but they consider a broader range of material environmental, social, and governance issues and impact metrics in addition to those related to climate change.
Climate-aware funds span a range of approaches that can be organized into five types:
So far in 2021, asset managers, particularly in Europe, have focused their product development efforts on climate-conscious funds, which represented a third of all climate fund launches, followed by clean-energy/tech funds (27%) and climate-solutions funds (19%).
Clean-energy/tech funds and climate-solutions funds remain the most popular types globally, accounting for 31% and 25%, respectively, of all climate fund assets.
The graphic below summarizes the different approaches of climate-aware funds.
The choice of one type over another largely depends on an investor's investment goals, risk appetite, and preferences. For example:
Climate-aware investors can also take an all-of-the-above approach. To address climate risk in core equity holdings, investors can use low-carbon or climate-conscious funds or opt for more broadly based sustainable funds with low-carbon or climate-conscious features. They can make green bonds a central part of their fixed-income exposure, either via dedicated green-bond funds or more broadly based sustainable bond funds that invest a portion of their portfolios in green bonds. And they can dedicate a portion of their investments to climate-solutions or clean-energy/tech funds as a way to help finance the transition to net zero.
As COP26 dominates the news in the coming days, it will likely spark even more investor interest in addressing climate change in their portfolios, both to mitigate climate risk and to invest in climate solutions. With so many climate-aware fund options, understanding the range of strategies is an important first step in positioning portfolios to align with net zero goals.