Climate adaptors: the funds and stocks best adjusting
Talk of climate investing always conjures up the big beasts of the transition to a sustainable economy: alternative energy, electric cars, smart cities. However, behind these headline-grabbers, a more nuanced trend is emerging which addresses the fact that climate change is already here and we need to find ways to deal with it.
Policymakers are already on the case. COP26 made adaptation and resilience one of its main campaigns, referring to the statistic that climate-related and geophysical disasters are estimated to cost the global economy $520bn each year.
Climate change adaptation is also the second of six environmental objectives in the EU taxonomy framework – a classification system establishing a list of environmentally sustainable economic activities.
Spread across sectors and geographies, adapters aren’t always easy to identify, but this doesn’t mean investors are not trying to access the space.
Piergaetano Iaccarino, head of equity solutions at Amundi, said climate change adaptation solutions are becoming increasingly important to complement more direct ways to invest sustainably, especially where solutions are not available, or require longer timeframes and bigger investments.
Amundi’s team is looking across different sectors, including insurance and other financial risk-transfer mechanisms. He said these play a critical part in the adaptation plan, as they aim to reduce vulnerability to the direct impacts of climate change, such as more frequent and more severe extreme weather events.
The team has exposure to some of the largest European insurance companies that are heavily investing in this field, including one firm that offers a new parametric risk transfer and assistance service called FastCat.
Although Iaccarino couldn’t comment on Amundi’s specific holdings, a quick browse on the internet reveals that French insurer AXA launched such a service in November 2019.
‘FastCat will offer weather alerting and 24/7 real-time assessment using technologies such as satellite imagery and drones, as a way to support communities and corporations facing natural disasters such as floods, earthquakes, cyclones and wildfires, and provide necessary climate-related insurance products. Notably it will also provide faster claims settlements,’ Iaccarino said.
Be it Texas storms, Californian wildfires or flooding, housing is one of the sectors that will feel the pain of drastic temperature swings acutely. Anu Narula, a fund manager at Mirabaud, invests in US-based Advanced Drainage Systems as part of the real estate and infrastructure theme within his global equity funds.
He said the firm makes drainage structures to manage the flow of urban stormwater using lightweight, recyclable, high-density polyethylene pipes. ‘This reduces the chance of flooding and sewage overflows in extreme weather conditions, using material that is less energy intensive to install, has a longer service life and is more recyclable than its concrete and steel alternatives,’ he added.
Narula said there is an estimated $108bn (€91.7bn) funding gap in water and waste water infrastructure in the US, which means Advanced Drainage Systems could also benefit from Biden’s green infrastructure spending.
One of the most visible impacts of climate change is rising temperatures, which we all feel in our homes. Jaime Ramos Martin, manager of the Aviva Investors Climate Transition Global Equity fund, said this is where manufacturers of heating, ventilation and air conditioning systems have a role to play.
One company he holds which produces such solutions is Trane Technologies, another US-based business. ‘There is likely to be an increased demand for clean and efficient cooling systems that allow companies and the population to adapt to these temperatures,’ he said.
‘Home Depot, the market leader in the home improvement sector for consumers and professionals, is likely to see demand tailwinds for repairs and investment in prevention. ‘Eventually regulation on emissions from residential property will tighten, leading to a need for investment in insulation and lower emissions products for heating and lighting homes,’ he said.
Water management is another climate adaptation topic fund managers bring up within the housing and utilities context. Amundi’s Iaccarino said his team invests in a Japanese company that focuses on curbing flood damage and also provides sophisticated rainwater storage systems to tackle water shortages.
Aviva Investors’ Martin holds Xylem, a US-based company that provides products and services to help people use water more efficiently. ‘We believe water infrastructure, both in developed and developing countries, will require substantial investments for a better and smarter use of resources. In our view, the growth opportunity is better than the market anticipates,’ he said.
Fund managers also see opportunities in the home repair and upgrades space. Jerry Thomas, head of global equities at Sarasin & Partners highlighted Home Depot as a firm that sells products to help people adapt to climate change.
|The most popular funds held in Citywire’s|
|Thematic Equities – Ecology sector|
|Nordea 1 – Global Climate and Envmt.|
|BNP Paribas Energy Transition|
|Schroder ISF Global Climate Change Eq|
|Pictet – Global Environmental Opps|
|Mirova Europe Environmental Equity|
|BNP Paribas Climate Impact|
|Vontobel Clean Technology|
|BNP Paribas Global Environment|
|ERSTE WWF Stock Environment|
Not all the solutions for more resilient homes are physical. Randeep Somel, manager of the M&G Climate Solutions fund, said an important climate adapter in his portfolio is US software provider Autodesk.
The firm’s AutoCAD and Revit software programs are used by architects, engineers and structural designers to design and make models of products and buildings.
He said the firm is both a climate solution provider and a climate adapter, as it not only commits to sustainable design practices, but also ensures climate resilience is at the forefront of design and that buildings are capable of withstanding the incoming changes.
‘This is becoming an increasingly important factor in terms of business continuity, safety and insurance,’ Somel added. Although Autodesk is providing software for more resilient buildings, the firm lies within the bigger technology space which is playing its part in climate adaptation. Amundi’s Iaccarino said big data and AI can also contribute to this trend.
He referenced the AI for Earth platform provided by a prominent US software company. While Iaccarino did not name the firm, it fits the description of one overseen by Microsoft.Iaccarino said such solutions help to anticipate natural disasters and facilitate more prompt reactions.
However, although there are plenty of ideas about tapping the investment potential of climate adapters, some obstacles remain in place. Aviva investors’ Martin said the revenue generation from climate adaptation activities doesn’t always meet his team’s threshold.
‘This is the main issue we face in general. We look for companies with at least 20% of revenues directly related to climate change solutions. This sometimes narrows the options as some of the pure plays tend to be illiquid,’ he said.
This article originally appeared in the April edition of Citywire Selector magazine.
Published at Tue, 15 Jun 2021 14:11:54 +0000