Finding the right climate strategy is becoming increasingly complicated.
In Europe, investors are focused on decarbonization efforts as a way to reduce environmental risks and encourage companies to lower emissions. In the US and China, investors seem more interested in clean-energy innovations such as solar panels, carbon capture, electric vehicles and battery technologies.
While these investment approaches may not seem very different on the surface, they will ultimately decide where billions of dollars in capital end up as part of the worldwide push toward net-zero emissions.
“Asset managers are responding to this demand by launching new funds with climate-related mandates and repurposing old strategies,” said Hortense Bioy, global director of sustainability research at Morningstar Inc.
At the end of last year, there were a record 1,206 mutual funds and exchange-traded funds globally with a climate-related focus, up from 950 at the end of 2021, according to Morningstar. The funds have collective assets under management of about $415 billion.
And it remains one of the money-management industry’s hottest areas of growth. Analysts at Bloomberg Intelligence published a report this week saying that ETFs targeting climate themes accounted for about 40% of all newly opened funds during the first quarter.
Separately, analysts at BloombergNEF said investment in the energy transition increased for the third straight year in the Americas, the Asia-Pacific region, Europe, the Middle East and Africa, topping $1.1 trillion in 2022. Asia saw the fastest growth, led by China, where spending exceeded $545 billion as the country’s renewable energy and electric vehicle sectors have ramped up.
Europe remains the largest and most diverse market for climate funds, followed by China, which two years ago overtook the US as second biggest, according to Morningstar.
Climate funds aren’t immune to “the challenging macro environment of inflationary pressures, rising interest rates, lingering recession fears and the conflict in Ukraine,” Bioy said. Global climate fund assets declined 1.4% last year, which was minimal when compared with the overall 18% drop in global fund assets.
“Climate fund assets held up better thanks to continued investment flows and an accelerated pace of product development,” Bioy said.
However, in the US, climate funds saw their assets decline by 15%, largely because of a slump in clean-energy tech stocks. The reality is US investors saw the sector as overvalued and instead bought shares of traditional energy companies as oil and gas reached record prices, Bioy said.
The worst performers include the Invesco WilderHill Clean Energy ETF (ticker PBW), down 30%, and the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN), down 17%, in the past year.
“Despite the tremendous growth seen in climate investing and net-zero commitments over the past few years, it is increasingly clear that we need to see faster and more widespread action,” Bioy said. Worldwide emissions must fall 50% by 2030 and reach net zero by 2050 to have any chance of containing the global temperature increase to 1.5C, she said.
Ultimately, global cooperation between governments is required to address the full scope of this threat, but the private sector and investors also play a vital role in the climate transition, Bioy said.
“In this rapidly evolving space, it’s even more important that investors do their homework because many climate funds have a relatively short history,” she said. “With most launched in the past couple of years, their performance can be hard to assess.”
For investors, the key is to understand “the funds’ investment objectives, portfolio construction processes and expected outcomes,” Bioy said.
Sustainable finance in brief
In the US, sustainable finance may be sinking under the weight of far-right politicization, but everywhere else the sector is popping. Global sustainable bond sales saw the busiest April on record as first-time issuers helped power a borrowing blitz. New sales of green, social, sustainability and sustainability-linked bonds totaled $83.4 billion last month, making it the most active April since the inception of the green debt market in 2007, according to data compiled by Bloomberg. Sales of green bonds, the largest category of sustainable debt by amount, reached $52.4 billion, also a record for April. “Globally investors are becoming more sustainable as a whole and focusing more on sustainability,” Stephen Liberatore, head of fixed-income ESG and impact investing strategies at Nuveen, said in an interview. “The market is simply responding to this consistent, increasing demand.”
- That may be, but elsewhere there are rough seas. Investor interest in ETFs that promote higher environmental, social and governance standards is slowing, and more issuers are shutting down those funds.
- Meanwhile, insurers are being forced to rethink any unified approach to the climate crisis, lest they risk being sued for antitrust violations.
- The world’s biggest ocean friendly debt swap is coming together in Ecuador, part of a plan to protect the Galapagos Islands.
To contact the author of this story:
Tim Quinson in New York at email@example.com
© 2023 Bloomberg L.P.