Climate Change's Secret Other Side: There is Money to be Made

Greta Thunberg’s sail across the Atlantic to attend the UN’s Climate Action Summit was an exhilarating event not just for climate change activists but for the investment community as well. She is a fresh reminder that the world is changing and that we need to bring climate considerations into all of our decisions, including how we allocate our money. The current climate (pun intended) presents asset managers with a unique opportunity to make money while doing the right thing. If climate change has not been a part of your investment strategy, it is time to reconsider whether it should be.

Money often drives change. In this case, that push is coming from two directions – allocators and direct investors. On the allocator side, more and more institutions and funds are voting with their dollars. New York City Employees’ Retirement System, which manages $66 billion, has made explicit that it is moving toward full divestment from any fossil fuel assets. Other allocators are taking a less hardline approach. The California Public Employees’ Retirement System, for example, has opted against divestment in favor of keeping companies in their portfolios and using shareholder activism to push them toward more environmentally friendly policies (with mixed results). There has also been an uptick of interest in funds that tout their focus on environmental, social and governance (ESG), and Congress now considering a bill to force public companies to disclose ESG metrics.

The strategies on the asset manager side, not surprisingly, mirror these approaches. Some managers, such as Green Century Funds, are moving along the lines of the divestment pension funds and limiting their investment to fossil fuel-free companies. Private equity and venture funds continue to drive innovation, with investments in entrepreneurs who are working to slow the effects of climate change and to anticipate the world with a new climate. The GMO Climate Change Fund is investing in a mixed portfolio of solar technology, copper (considered dirty but necessary for solar and wind technology), and fish farming, a smaller contributor to greenhouse gases in comparison to cattle. Other funds, like Pax Global Environmental Markets Fund, are investing in technologies that will be much needed in a warmer world. The Pax fund’s top 10 holdings include Suez, a water treatment and waste management company, and TE Connectivity, Ltd., which produces sensors that can withstand harsh environments. Still other managers, such as Impactive Capital, RockCreek, and Cornerstone, are partnering with their portfolio companies to drive ESG-based improvements that also lead to greater profitability.

What does all this mean for money managers? No matter how you look at it, environmental wellness is a growing industry. If your current strategy does not consider climate change, and if you have not already heard from your investors, get ready. For some, moral and ethical returns are as important to their investment story as the hard dollar profits they receive. Other investors simply see the profit potential in this industry. Either way, investors want to know that the people managing their money stay current with developments in the scientific and legislative arenas. Be prepared to discuss your approach on your next roadshow, in your PPM, and do not be surprised if it pops up in LPAs. An increasing number of investors are asking: how is your fund positioned to take advantage of this growing industry – possibly the growth industry of the 21st century?

If you have any questions about this alert, please contact Jessie M. Gabriel at jgabriel@bakerlaw.com; +1.212.271.1508, Panida A. Pollawit at ppollawit@bakerlaw.com; +1.212.589.4205 or any other member of BakerHostetler’s Investment Funds team.