Financial planners should be wary of short sighted, ‘green-boxed’ investment vehicles designed to capitalise on the growing demand for socially responsible investing (SRI), according to MLC Implemented Consulting senior asset consultant David Klug.
Klug said many green-themed investments in the marketplace, particularly those claiming to offset carbon dioxide (CO2) emissions, are not sustainable over the long-term — either from an environmental or an investment perspective.
He said research by the United Kingdom-based Financial Times newspaper has proven that carbon offset schemes, such as reforestation, will not make a significant contribution to reducing carbon dioxide emissions. ‘Clean’ and renewable energy sources (such as ‘clean’ coal and electricity and nuclear power) will make the biggest difference. Furthermore, the Financial Times concluded that unregulated schemes’ lack of credible standards is a serious concern and that even regulated schemes, including those that adhere to the Kyoto Protocol Clean Development Mechanism, can be flawed.
“You really have to question the sustainability of some of the green-boxed investments around at the moment,” said Klug.
In Klug’s opinion, broad, active mandates that enable fund managers to select what they consider to be the best ideas in the SRI space, without having to worry about adhering to themes, indices and short-term progress reports, are most likely to succeed.
“We believe the best results can be achieved by giving the manager as broad a mandate as possible … Changes will be played out over decades, so our managers need this type of long-term investment horizon.”
Klug said climate change, and global efforts to combat it, will have significant impacts for most, if not all, asset classes. He said research by global asset manager Alliance Bernstein, which predicted that clean electricity, coal (70 per cent of it clean) and nuclear power would make up most of the $5 trillion power generation industry by 2030, suggests investments in these areas will be lucrative.
He said the property sector is already evolving in response to the growing demand for ‘green buildings’, while shares in businesses marketing certain ‘green technologies’ (the so-called ‘watt-coms’) are sky-rocketing.
He said global efforts to combat climate change have also created new hedging and diversification possibilities. He said weather derivatives (used to reduce risk associated with adverse weather conditions) represent the fastest-growing sector of the derivates market, while catastrophe bonds (securitised insurance options) are also proving increasingly popular.
