The right way to go green…
Back in 2008, around the time of MASECO’s inception, iShares were quick off the mark to set up an exchange traded fund investing solely in global green-energy stocks. The world was on its knees, but green energy offered a rare ray of sunshine, if you will excuse the pun, and green energy stocks were very much in fashion with prices to match, so this seemed like a great idea from iShares. But sadly fashions do not endure, as the dot com boom painfully taught us, and today the iShares ETF is down an eye-watering 79% since its inception (Source: Morningstar). However, the good news is that there are other ways to vote with your feet and “go green” from an investment perspective. While the very narrow class of green energy stocks had had a turbulent time of late, it is not all doom and gloom for tree-hugging investors – far from it. A more sophisticated approach is to start with a broad asset class, for example the MSCI All Country World Index (ACWI), and then overweight companies with the greatest green credentials, while underweighting or screening out entirely those with the worst track record. Blackrock has recently published a paper claiming that it is possible to track the MSCI ACWI with an annual tracking error of just 0.3%, while investing in companies with annual carbon emissions 70% lower than the index as a whole (Source: Blackrock Investment Institute). 30 basis points seems like a reasonable trade off to lower the emissions billowing out of your portfolio by a whopping 70%. There is also the additional cost of carbon screening, but this tends to be a fairly manageable 10 basis points or so (0.1%).
There may be other factors, as yet unproven, that might make going green a good bet for investors. In the same way that we know investors get compensated for investing in small or undervalued companies, there is the tantalising possibility that investors may also get compensated for investing in companies with strong green credentials. The argument is 2 fold: first that we are morphing into a world where stinky companies are being forced to fit the bill for their smelly practices, or to use technical jargon, the negative externalities they inflict on the environment, through a combination of imposing fines and the licensing of smelly practices – think carbon credits. As their costs increase, the returns on offer to investors decrease. The second argument is simply that companies with a better handle on their environmental footprint are more likely to have better controls elsewhere in their business model, and therefore generate greater profits than their smellier neighbours. These arguments are good in theory, but there is currently little evidence to back them up, and there is also the problem that going green can increase costs and therefore squeeze profits, so the jury is currently out.
Finally we need to consider the political landscape. Donald Trump is a climate change denier, while Theresa May has abolished the Department for Energy and Climate Change here in the UK, and is significantly less of a tree-hugger than her predecessor David Cameron. Without the political will, companies may find it easier to continue to pollute relatively unchecked, but at MASECO we think and hope the tide is changing, and that there is a right way to go green….
Past performance is not an indicator of future results. You should remember that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.