Greening your investment portfolio

There are dozens of green ETFs on the market.

One of the most common questions now asked by investors is how to invest in the move towards a “greener economy”?

It’s not that investors are suddenly gripped with a horror over climate change: It’s something closer to FOMO — Fear Of Missing Out.

Whatever your views on the wider environmental debate, there is in fact no debate over the investing picture: the evidence builds year after year that green investing pays better than ­traditional profit-at-all-costs ­investing.

We can squabble about definitions ad nauseam, but the results keep coming out the same — the latest from Bloomberg’s New Energy Finance unit that shows the market capitalisation of “clean companies” growing exponentially, while “fossil fuel” stocks show a marked decline in market capitalisation.

Or as Bloomberg puts it: “Investing in clean companies proves its capacity to generate higher returns with similar risks to that of the traditional market.”

Australia is dominated by banks and miners and woefully lacking in big tech or healthcare. So how do we follow the money?

Unfortunately, just now this is quite difficult — it’s not like there are a string of blue-chip “green” leaders obviously sitting on the ASX.

You can, of course, start looking for companies and funds that will be primarily located offshore, but in reality most investors want to look at how they can make sure their own portfolio of locally ­focused assets are optimally placed.

Or you can begin avoiding the more obvious polluters such as pure-play coalmining stocks or building-materials companies.

When it comes to environmental classification, the vast ­majority of our major stocks would be categorised as “transition” companies, where they are not quite green, but they are making changes that will improve their scores. Into this basket you can put many banks, industrials and even diversified miners.

Moreover, you will always get smart companies working to make sure they don’t get “stranded” by changes ahead.

Turning green

Here’s two seemingly unlikely examples: Fortescue is best known as an iron ore miner that earlier this week announced bumper profits. Yet it also has substantial plans for green hydrogen — that’s “clean” hydrogen you get based on renewable power: Fortescue and its founder, Andrew Forrest, are thinking ahead to the day when steel making will need to be “green” and Fortescue will need to have a ringside seat if it wants to stay a leader in the iron ore ­business.

Similarly, Commonwealth Bank — like all banks — is planning ahead for a time when renewable power gets precedence over coal and oil. Earlier this week it launched a green loan program where it offers fixed-rate loans at 0.99 per cent for the purchase of renewables such as solar panels in homes. There are conditions: you have to be a CBA home loan customer already, but it’s a bright idea and it’s the sort of thing that gives the bank a seat at the table in the green economy.

Credit Suisse, one of the world’s biggest banks, has just published a green guide for investors. It’s called “The decarbonising portfolio report”, and it’s worth digesting the key elements of this paper.

As Andrew McAuley, chief investment officer for Australia at Credit Suisse, explains: “We are finding more and more high-net-worth clients want help in this area. They want to get their portfolios in tune with the bigger changes in the economy.”

For the uninitiated, Credit ­Suisse takes the time to break down the key areas where the ­action is expected to occur — the obvious areas are improved solar, wind and battery power. Electric vehicles and plant-based meat are here, too, but it is the latest advances that should capture the ­imagination of any long-term ­investor.

Future prospects

Three new technologies stand out:

● Nuclear power

Controversial yet still hailed by many as “renewable”, things are changing in this space with what are called Small Modular Reactors (SMRs), which are partially based on new designs that promise to produce less nuclear waste;

●Carbon-neutral cement

New technology in this notoriously polluting industry promises that cement, rather than being a bad carbon emitter, could actually capture carbon during production; and

●Green hydrogen

Long promised and often derided (by Elon Musk, for example), the promise this time round is for heavy industry and commercial transportation such as shipping. (Fortescue’s plans for steel making fit neatly into this cat­egory.)

What else?

Separately, a new “asset class” stands out that is tagged as “climate-focused hedge funds”, where the funds logically enough go long on the good guys and short on the bad guys.

For many investors this will seem all too hard, and perhaps an easy way to get started is simply to look at exchange-traded funds.

There are dozens of “green” ETFs on the US market, and at least two on the ASX that advisers regularly recommend — the Beta­Shares Australian Sustainability Leaders ETF and VanEck Vectors MSCI Australian Sustainable Equity ETF. For global options there’s the ASX-listed BetaShares Global Sustainability Leaders ETF.

Cynics might call “greening” your portfolio pie in the sky, pragmatists might say if we can get even a peep at the future direction of investment markets we can — like those high-net-worth clients ­— be ahead of the game.