Global head of climate change investment research at DB Climate Change Advisors, Mark Fulton, has a contrary view to most observers, post-Copenhagen. He spoke to Amanda White about the climate change market and the asset allocation implications for investors.
Most analysis post-Copenhagen has concentrated on the seeming lack of tangible results – no legally binding agreement or an agreed emission reductions target – inferring negative connotations only.
But the climate change investment group at DB Climate Change Advisors, led by Mark Fulton, has more of a “glass half-full” perspective citing the countries that are the largest emitters agreeing to take action as a positive step.
“Very few people expected a legally binding deal, and to come out with an accord where the largest emitters are signed up, that is positive,” Fulton says.
Fulton believes there is never going to be an accord that is a one-size-fits-all and concedes there is some disappointment there was no hard emissions target in the developed world. He still supports the view that a carbon market is a necessary development.
But he stresses investors need to remain very focused on what drives markets, and that local level and country level targets are the key to that.
Despite the lack of results at Copenhagen, Fulton contends there are still plenty of opportunities for investors who take a global view.
DB Advisors produced a global tracker document last year, which included an aggregate risk rating of countries based on key mandates and supporting policy frameworks. The belief is that investors will become increasingly concerned about regulatory risk, and countries that deploy a transparent, long-lived, comprehensive and consistent set of policies will attract global capital.
According to the report China, Germany, France and Australia all have lower risk profiles for climate change investments because their governments have strong incentives in place, along with a consistent approach.
Notably the US, UK and Canada are moderate risk as they rely on a more volatile market incentive approach, and in the case of the US have suffered a stop-start approach in some areas, such as the production tax credit.
“For a global investor there are plenty of good, well-constructed policies creating markets and driving capital,” Fulton says.
DB’s mantra when it comes to climate change investing is that investors want transparency, longevity and certainty.
In its latest report, examining asset allocation implications, DB argues that climate change investment is growing rapidly relative to the broader market, providing a distinct and identifiable source of alpha.
The report also outlines a strategic asset allocation to consider climate change as part of portfolio construction. It uses an aggressive overweight of a 6 per cent allocation to climate change sectors, compared to a 2 per cent global market capitalisation weight.
It concludes, conservatively, that an ongoing assumption would be a 5 per cent excess return for climate change sectors, which would give an additional 0.4 per cent to the total portfolio.
For large investors the easiest way to access climate change opportunities has been through private equity and venture capital in the form of new technology and climate change technology investments.
However Fulton sees many opportunities in other asset classes including infrastructure and the lesser recognised public equities.
He believes there will be a lot of development within energy and water and expects to see a proliferation of renewable infrastructure funds.
DB estimates in the next five to 10 years there will be more than $10 trillion of investment in infrastructure with more than half going to water.
Within portfolios, DB Advisors tends to look at climate change as a theme when analysing potential investments, rather than a sector.
“Sometimes clean tech is the closest thing to a sector, but it’s really a smaller subset of climate change, the difference is we see climate change as having more agriculture in it,” he says.
“Overall we see climate change as a theme in the major asset classes and you can create specific strategy or product or see it as an investment factor.”
Within its own equities team Deutsche has made a carbon risk management analytical tool, provided by RiskMetrics, available to portfolio managers through its platform.
DB hasn’t published any research on the carbon beta tilt, but Fulton quotes research by Innovest, now owned by RiskMetrics, that shows a positive effect on returns.
He is also aware a lot of investors are taking a wait and see approach, conceding there is not a deep product market yet.
However DB is making significant inroads in order to make investors more comfortable, including the development in February of a clean tech index in conjunction with NASDAQ.
The index is comprised of 110 companies identified by DB from a global universe of more than 4,000 that have at least a third of revenues derived from clean technology, that have investable geographies and exchanges identified by NASDAQ QMX.
The index has a price return and a total return version.