Huge swathes of Europe, North America, Asia and Africa have endured boiling conditions this summer, with the majority of scientists pinning the blame for the planet’s exceptional heat and rain, as well as wildfires in countries such as Greece and Canada, on human activity.

Data from the EU-funded Copernicus Climate Change Service showed that the first three weeks of July were the warmest three-week period on record. And there is more to come, with the World Meteorological Organization predicting a 98% likelihood that at least one of the next five years will be the warmest ever recorded.

‘The extreme weather – an increasingly frequent occurrence in our warming climate – is having a major impact on human health, ecosystems, economies, agriculture, energy and water supplies,’ warns the WMO’s secretary general Petteri Taalas. ‘This underlines the increasing urgency of cutting greenhouse gas emissions as quickly and as deeply as possible.’

IN HOT WATER

Hot oceans are amplifying weather-driven catastrophes. According to ERA5 data, daily sea surface temperatures averaged over the global extrapolar oceans (60°S-60°N) have stayed at record values for the time of year since April 2023. Scientists have identified an Argentina-sized chunk missing from the sea ice on the Antarctic Ocean, which reached by far its lowest level for any June this year.

And in a development with echoes of Hollywood movie The Day After Tomorrow, scientists have concluded that a system circulating water within the Atlantic could collapse between 2025 and 2095, if greenhouse gas emissions continue at present levels.

Known as the Atlantic Meridional Overturning Circulation or AMOC, this current is a major tipping element in the global climate system. Climate models show the AMOC is likely to weaken in future because of global warming and the Intergovernmental Panel on Climate Change has suggested it could lead to a collapse in the 22nd century, resulting in dramatic changes in every nation’s ability to provide sufficient food and water for its population.

PLANET-SIZED OPPORTUNITIES

Appetite for investing in environmental challenges has waned recently, with high inflation and rising interest rates impacting the valuations of growth stocks and cost-of-living pressures reducing the willingness of voters to support the rush towards net zero.

Nevertheless, combating climate change is one of the biggest challenges society faces and the good news is that companies around the globe are rising to the challenge through widespread innovation.

Jon Wallace, manager of Jupiter Green Investment Trust (JGC), says the recent heatwaves and wildfires are a catalyst for public interest, bringing what might seem to be distant climate risks into sharp focus. He adds: ‘Although the climate risk reports from the IPCC have been outlining the dangers for some time now, the message is heard more clearly when it is linked to real-world events.’

Wallace points out that even in parts of the world where climate science has been contentiously debated, there are signs that high-impact weather events are shifting opinion over time, leading to support for climate policy, both in mitigation and adaptation.

The Jupiter stock picker also believes that estimates for climate-related investment are a good substitute for market size and notes that Bloomberg New Energy Finance puts that at around $7 trillion per year of required investment, spanning electric vehicles and power grids, for instance.

‘On top of this, sectors such as agriculture represent an additional spend,’ he explains. ‘The US Inflation Reduction Act introduced by Joe Biden in 2022 provides $369 billion of spending over
10 years, including $158 billion on clean energy, $13 billion on electric vehicle incentives, $14 billion in home energy efficiency upgrades, and $22 billion in home energy supply improvements.’

Yi Shi, client portfolio manager at Pictet Asset Management, says the global environmental solutions market is estimated to be worth
$2.5 trillion and is growing at 6% to 7% per year.

Sara Bellenda, manager of the JPM Climate Change Solutions Fund (BNKF8S9) and the actively managed exchange-traded fund JPMorgan Climate Change Solutions (T3PM), believes ‘the opportunity is gigantic and can only increase from here’.

She says within the context of targets set by many governments, there is need for $275 trillion of investment, according to McKinsey, to reach net zero targets by 2050.

Fotis Chatzimichalakis, co-manager of Impax Environmental Markets (IEM), finds it ‘remarkable’ that despite the challenging macro conditions of recent years, ‘we have seen continued and even strengthening policy support for the end markets that we invest in’.

In the European Union following the energy crisis last year, there has been more focus on decarbonising the economy and having security of energy supply, although Michael Rae, manager of M&G Climate Solutions (GB00BNC0XP41), points out that Europe has struggled to come up with an emphatic response to the US incentive package, partly because it is trying to reform its power markets in the wake of its move away from Russian gas supply.

WAYS TO BEAT THE HEAT

Passive funds playing a part in slowing down global warming and limiting temperature rise include the Lyxor Green Bond ETF (CLIM), which tracks the Solactive Green Bond index, a benchmark of euro and US dollar-denominated investment-grade green bonds issued by sovereigns, supranationals, development banks and corporates. The proceeds from the bonds are used to finance eligible green projects.

In terms of actively managed funds, investors should note a near-20% discount to net asset value on Pantheon Infrastructure (PINT). The investment trust provides exposure to a diversified global portfolio of companies and projects that can support the transition to a low-carbon economy.

Jupiter Green Investment Trust trades on a 16% discount to net asset value, while JPM Climate Change Solutions Fund focuses on five buckets: renewables and electrification, sustainable construction, sustainable food and water, recycling and re-use, and sustainable transport.

‘We invest in leaders in their sectors and leaders in certain technologies,’ says JPM’s Sara Bellenda. ‘And we also focus on profitable companies that reinvest their cash flows into new and emerging technologies as opposed to investing in smaller start-ups that are in an emerging phase.’

IDENTIFYING GROWTH OPPORTUNITIES

Michael Rae manages the M&G Climate Solutions Fund (BNC0XR6), whose holdings include hydrogen fuel cell technology developer Ceres Power (CWR) and Alfen (ALFEN:AIM), Europe’s largest maker of electric vehicle charge points for homes and business premises.

Rae says global clean energy investment levels are currently in the range of $1.2 trillion to $1.4 trillion each year. He adds: ‘Government policy and country-level emissions commitments imply an increase to around $2 trillion per year by 2030, but achieving net zero emissions would likely require more than $4 trillion per year according to the International Energy Agency.’

This approach only considers power-related emissions, missing the potential in areas like industrial decarbonisation, sustainable food and agriculture and the circularity of plastics. ‘Considering the total addressable market for climate solutions quickly veers into a world of very large numbers,’ says Rae.

The fund manager says dig deeper and it is possible to identify some more tangible near-term growth dynamics. ‘For example, electrification of the vehicle fleet and the replacement of home gas boilers with heat pumps imply power demand even in developed markets like the UK will more than double over the next 30 years.’

Rae believes the implications for investment in the grid, which transmits and distributes electricity to consumers, are profound, with the IEA estimating a trebling in investment levels this decade is required to meet targets.

‘The decarbonisation of stationary back-up power, at building sites, or in large office buildings or data centres presents another attractive area of growth. The incumbent technology is diesel back-up generators, which although only used infrequently are still not compatible with corporate net zero targets. If these can be displaced by hydrogen fuel cells then a new industry has been created as a result of the energy transition.’

THREE KEY PICKS

Impax Environmental Markets (IEM) 407p

Ongoing charge: 0.81%

A 5.3% discount to net asset value presents a buying opportunity at Impax Environmental Markets, one of Shares’ running Great Ideas picks, which has grown assets under management from £379 million to £1.3 billion over the past 10 years.

Over five years, the trust’s annualised share price and NAV returns are 10% and 10.4% respectively, ahead of 8.9% from the MSCI All Country World index.

However, high inflation and rising rates have created headwinds for the small and mid-cap growth companies in which the fund invests, leading to underperformance of the MSCI All Country World index in the six months to June 2023, but policy support from the US Inflation Reduction Act and the EU’s Green Deal Industrial Plan is poised to drive accelerating growth in its markets.

Top 10 holdings include Canadian offshore wind developer Northland Power (NPI:TSE) and engineer Spirax-Sarco (SPX), which provides products and expertise that improve production efficiency and help customers meet environmental sustainability targets.

Impax Environmental Markets recently re-established a position in building materials group Kingspan (KGP), which Fotis Chatzimichalakis insists has tailwinds ahead of it in terms of higher adoption of insulation in buildings.

The trust also offers exposure to Dutch lighting company Signify (AMS:LIGHT), a beneficiary of the drive towards efficient lighting within infrastructure, and it recently took a stake in Shenzhen Inovance Technology (300124:SHE) which produces inverters, servo motors, industrial robots and electric vehicle powertrain components aimed at optimising energy usage for industrial automation equipment and electric vehicles.

Pictet Global Environmental Opportunities (B4YWL06) £297.40

Ongoing charge: 1.1%

While ongoing charges are on the high side, Pictet Global Environmental Opportunities has generated 10-year cumulative total returns of almost 200%, comfortably outperforming the 138% from the IA Global sector.

A concentrated global portfolio with a growth and quality bias, the fund invests in environmental solutions providers with ‘wide economic moats, robust profitability, healthy balance sheets and business models that don’t rely on government subsidies,’ according to Pictet’s Yi Shi.

Investments include American water technology provider Xylem (XYL:NYSE) and semiconductor wafer fabrication equipment maker Applied Materials (AMAT:NASDAQ).

The latter plays a critical role in creating semiconductors that supply end markets like electric vehicles and industrial electrification, which are key to the drive towards a net zero future.

Another portfolio holding is Eaton Corp (ETN:NYSE) which provides energy efficient solutions to assist customers in effectively managing electrical and mechanical power more reliably, safely and sustainably and has the long-term ambition that 75% of its products will help with climate change mitigation or adaptation by 2050.

JPMorgan Climate Change Solutions UCITS ETF (T3PM) £22.66

Ongoing charge: 0.55%

Investors seeking low-cost exposure to companies offering solutions to the warming planet should consider JPM Climate Change Solutions, an actively managed exchange-traded fund with charges of just 0.55%.

The ETF launched in June 2022 and is relatively small with £15 million of assets under management. However, it is managed by seasoned ESG investors Francesco Conte, Yazann Romahi and Sara Bellenda and holds 52 companies linked to the fight against climate change including Xylem, as well as heating, ventilation and air conditioning company Carrier Global (CARR:NYSE), a play on the sustainable construction theme, and Quanta Services (PWR:NYSE) which provides infrastructure services for the electric power, industrial and communications industries.

Other holdings include NextEra Energy (NEE:NYSE), the world’s largest generator of renewable energy from the wind and sun, and Mercedes Benz (MBG:ETR), the electric vehicle maker which is ‘ahead of the pack in battery recycling’ according to Bellenda.

The pound-denominated version of JPM Climate Change Solutions ETF has returned 11.4% since launch, according to FE Fundinfo.

DISCLAIMER: Daniel Coatsworth who edited this article owns units in Pictet Global Environmental Opportunities.

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