Climate change might be a hot political topic but it’s yet to develop as an investment theme because the returns are said to be “underwhelming”.
That comment is contained in a research report sent to clients last week by a leading investment bank, J.P. Morgan.
Starting with a question: “Why invest on climate change?” the key finding is that climate change investing “belongs in your strategic portfolio”, but returns so far are unimpressive.
More Talk Less Action
Penned as a long-term strategic advisory note for clients, the report said interest in climate change investing had been steadily rising: “but there is also a surplus of talk over real action”.
The definition of climate change investing, according to J.P. Morgan, is directing capital so that it helps fight climate change and is away from assets that might worsen greenhouse gas emissions.
A simple example is the difference between investing in a wind-turbine manufacturer versus a coal mining company.
Underwhelming Capital Inflows
“The actual impact of climate change inflows itself is still underwhelming to us as beyond improving E-scores (environmental scores) of reporting firms, global carbon emissions and density continue to worsen,” J.P. Morgan said.
More importantly, the bank added that: “Actual returns on climate-change investing, which ought to gain from a move to a low-carbon world, remain unimpressive.”
Four reasons are listed for the lack of performance by climate-change companies and funds. They are:
- More talk than action on the changes in behavior and policies needed to create a low-carbon world.
- Weak profitability of firms active in climate-change technologies.
- Offsetting capital flows by investors focused on traditional yield and value, and
- High fees changed by firms managing climate-change funds.
Climate Conference Failure
Interest in climate change as an investment option was boosted last week by a United Nations sponsored climate summit in Madrid, the capital city of Spain.
Despite starting with high hopes the summit has been widely-reported to have been a failure. J.P. Morgan’s analysis of climate-change investing coincided with the meeting in Madrid.
The bank said much of the problem relating to under-performance of climate change as an investment thesis was the result of slow efforts by policy makers, households, and companies, to try to reverse global greenhouse effects.
“We also find that companies in this space are not that profitable, itself possibly the result of no great breakthrough technologies and the early and costly scramble of many new firms trying to enter green tech.” J.P. Morgan said.
High Fees Don’t Help
“High costs and fees of managing climate-change funds do not help.”
The bank said one major issue of climate-change investing was that it needs to be sufficiently large to have an impact, as lower funding costs to green companies are too easily offset by fund managers who are more money yield and value oriented.
“Despite lackluster impact and returns so far, we do think that climate-change investing belongs in your strategic portfolio, J.P. Morgan said.
Climate Change Accelerating
“For one, climate change is accelerating, which is not only raising media and policy attention but also increases the odds of real change in policy, behavior, and technology.
“It should worsen the losses to assets located in regions and sector vulnerable to adverse weather, such as coastlines and P&C (property and casualty) insurers, thus providing diversification benefits from climate-change investing.
“Finally, the more people invest in climate change technologies, the easier their funding, the greater the gains to those holding green assets, and the worse the losses on non-green and brown assets.”