As the world begins to wholeheartedly embrace our current climate crisis and make moves to do their part to avert the oncoming crisis, investors are beginning to transition their investments into climate-friendly funds. Recently, the worldwide total included 400 funds that fall into the climate-focused category, with about 25% of those funds coming from the US market.
With a continually growing number of options, how does an investor choose which funds to invest in?
Climate-focused funds range from companies that naturally have a small carbon footprint to companies that build clean energy projects to combat climate change. Rather than looking at each of the 400 funds, Morningstar, a US based company that provides unaffiliated investor-focused news, writes in a recent report titled "Investing in Times of Climate Change - A Global View" that they've identified five groups that climate-focused funds can be categorized into.
1. Low Carbon - These funds invest in companies with a low carbon risk and relatively low carbon footprint.
2. Climate Conscious - These funds invest in companies that are better prepared for the transition to a low-carbon economy by considering climate change in their corporate strategy.
3. Climate Solutions - These funds invest in companies that positively contribute to a low-carbon economy through products and services that provide solutions to a low-carbon economy.
4. Green Bond - These funds invest in debt instruments that finance clean energy projects such as renewable energy, pollution prevention and control, green buildings, energy efficiency, etc.
5. Clean Energy/Tech - These funds invest in companies that take action to contribute to the clean energy transition, including renewable energy companies, energy storage, and carbon capture companies.
According to Morningstar, as of December 2020 there were $177 billion US dollars under management in the 400 climate-focused funds that fell into one of these five categories. Europe still has the largest climate-focused funds market, and the market has grown rapidly, doubling from 2018 to 2019, and almost tripling from 2019 to 2020. This growth shows the appetite of investors into ESG and climate-focused funds, and positions the worldwide economy for a readier transition into clean energy solutions to reduce our overall carbon footprint.
We hope it's enough to avert the current climate crisis and rebuild the global economy after the global pandemic, though only time will tell.
*Read the full Morningstar "Investing in Times of Climate Change" report from April 2021 here.