Market forces, not government, driving climate change investing

Market forces will drive climate change investments, regardless of government intervention, climate change strategist at Deutsche Asset Management, Mark Fulton, says, with the application of climate change filters to bond portfolios marking the logical evolution of investment product.

The education is over, climate change strategist at Deutsche Asset Management, Mark Fulton, declares.

“Now the discussion is how to execute, how to implement,” he says.

Studies such as the recent Mercer asset allocation report, are welcomed by Fulton in particular because they raise awareness but also the challenges faced at a risk level.

But he is a big believer that the market argument for a low carbon economy already exists, so market forces are in play.

With this in mind he says the information gathering is over, and execution is a focus, with investors looking at two ways to execute, or implement, climate change into assets and the portfolio. One is by specific direct involvement with assets such as through venture capital, private equity and infrastructure, public equity and now bonds.

“The same thing effecting equities will affect debt ultimately,” Fulton says.

In fact there is anecdotal, and increasingly statistical, evidence to suggest the companies performing better in bond portfolios are those that have stronger measures around ESG.

Fixed income portfolio manager, at Deutsche Asset Management (Australia), Andrew Canobi, says the real risk in bond portfolios is to hold an issuer that defaults or has poor performance.

“With those poor performers there is often weak governance, and there is an association between weak governance and a lower regard for broader social impact and the environment,” he says. “The world is moving to a low carbon economy and carbon is being priced. The companies preparing for that will be the winners in a corporate bond portfolio.”

Deutsche has a best in class approach to its climate change fixed income portfolio, combining the best companies in an industry, measured by traditional investment characteristics, with the leaders in climate change preparation and mitigation.

The other way to implement climate change into a portfolio, Fulton says, is to make it a part of the investment process, across all thinking. “While this is a trend, there is still a way to go to get traction,” Fulton says. “It has to be an investment decisions not just ethical or social consideration.”

Track record is an important part of the investment evolution around climate change, and the more people get involved, the more it reflects in investment decisions and shows up in capital prices.

Fulton says the strongest evidence for ESG is around events such as the BP spill where there can be a measure of the real impact on capital prices.

“But shouldn’t we be pricing it better before it happens,” he says. “There is more recognition at the tails but we think it will be built more in the middle.”

Deutsche’s outlook is that climate generally is part of a sub theme of broader global changes in demographics, population growth, wealth and resources.

“So it is part of energy, food and water, the basics of the economy,” he says.

He argues that droughts in China, fires in Russia and floods in Australia – all weather related events – have been affecting prices.

“No one says yes that was climate change,” he says. “But one in 100 year events are more frequent.”

Fulton believes that climate change investment evolution is straight economics. And while renewable energies still need government incentives, costs are coming down, at the same time the cost of fossil fuels (outside gas) are going up.

As technology plays its part he believes, and it is part of the Deutsche ideology, there will be a point at which the prices converge, and then there will be a time at which the cost renewable energy will be lower.

“Renewable prices will come down and we will get to a point where the coal price will peak then prices will come down, it’s a demand/supply thing. In the long term the real cost will be the price of producing coal. It’s pure economics.”

While the economics of clean energy are in play, he does acknowledge, however, that a carbon price would be a helpful incentive, and that governments around the world need to provide clarity and consistency in their policies.

Fulton recently hired an analyst in China, whose first project will be to write the “renewable energy bible in China”.