There is an absolutely gigantic wall of money moving into environmental stocks and it is only going to get bigger.
The European Commission, European Central Bank (ECB), and China have all announced major policy initiatives in the past fortnight underlining their commitment to reducing carbon emissions.
This will require trillions of dollars of investment in new greener technologies if countries are to meet their targets and much of that money will flow into private companies. Investors have been piling into environmental equities looking to profit from this trend, driving share prices higher.
The strategy has been a standout performer through the Covid-19 pandemic. A basket of 56 global stocks which Saxo Bank highlighted in January as the best positioned to benefit from climate change policy is up a whopping 78% year to date. That compares to the S&P 500’s 1.2% rise and 24.5% for the S&P Information Technology sector.
Peter Garnry, Saxo Bank’s head of equity strategy, said: “The strong performance this year highlights the huge focus on climate-related stocks both from investors but also governments.”
The European Commission this month published its 2030 Climate Target Plan, which is aiming for an ambitious 55% reduction in greenhouse gas emissions from 1990 levels.
The proposal is a significant increase from the 40% reduction target agreed in 2014 as part of its broader goal of achieving carbon neutrality by 2050.
The European Commission is linking its climate plan to a massive €1.8trillion ($2.1 trillion) stimulus package designed to help the continent’s economy recovery from the pandemic. A minimum 30% of this money “will be spent in support of our climate objectives” it said.
China followed this last week by pledging to become carbon neutral by 2060. President Xi Jinping made the surprise declaration at the U.N. General Assembly, raising hopes that China, the world’s biggest C02 emitter, is getting serious about tackling pollution. Just how serious remains to be seen. No real details were given and cynics point to the government cutting funding for some alternative energy production this year.
But there is a feeling that it is adding to a gathering momentum and evidence that rather than deflecting funds, the pandemic has refocused minds on the environment.
Last week also saw the ECB announce that qualifying sustainability-linked bonds will become eligible for its asset purchasing from 1 January. This will broaden the appeal of sustainable investments to financial institutions.
Or as Garnry said, “the ECB’s decision means green has suddenly become the new black”.
How to play the theme
Investors have been quick to notice the strong recent performance of environmental assets.
Environmental-focused stocks (you can find the full list of Saxo Bank’s top picks by clicking here) have had a great 2020. But research from the Morgan Stanley Institute for Sustainable Investing found sustainable mutual funds also outperformed during the 2019 bull-run. Its data shows sustainable equity funds bettered the returns from their traditional peers by 2.8 percentage points in 2019 and by 3.9 percentage points in the first half of 2020.
Sustainable bond funds also delivered higher returns, although the margin of outperformance was lower at 2.3 percentage points last year and 0.8 percentage points in the first of this year.
“Sustainable investing is proving a rewarding opportunity for investors during times of both market expansion and severe volatility,” Morgan Stanley observed.
This is attracting a growing number of investors who previously believed that investing with their conscience meant sacrificing performance.
Flows into sustainable funds surged to a record high of $54.6 billion in Europe alone in the second quarter, according to Morningstar figures.
Asset managers have also been taking note, launching new products targeting all different aspects of sustainability. Between April and June, the number of sustainability-focused mutual and exchange-traded funds (ETFs) increased by 5% to 2,703.
Marshall Wace, the $45 billion hedge fund giant, caught the eye over the summer, announcing it is looking to raise $1 billion for its first fund investing in the wider environmental, social and governance (ESG) theme.
ETF providers BlackRock BLK-0.8%, Fidelity, and HSBC Global Asset Management have all expanded their ESG ranges this year.
UBS Asset Management said earlier this month that it will now offer climate aware funds across all asset classes, with both active and passive strategies, to provide the building blocks for client portfolios.
“The degree to which investors are embracing ESG as a fundamental investment driver, particularly around the issue of climate risk, is stark,” explained UBS Asset Management president Suni Harford.
“As demand continues to grow and sustainable assets amass more capital, we will see the investment landscapes transform even further. This is a trend which we believe is here to stay and investors in today’s markets must understand the effect that climate is having on their portfolio.”