How a climate change fund really works

BusinessGreen: What does an environmental analyst do?
Rick Stathers: I look at environmental opportunities at companies and the potential risk that might have to our shareholdings. We analyse and feed that information back to our fund managers; this is integrated into the investment process. We also use our shareholdings in companies to encourage them to improve their environmental, social performance, where there is a risk to long-term shareholding.

How do you choose which companies should be put forward for inclusion in the fund?
We look at which companies will be impacted by the need for society to adapt to climate change. With the mitigation argument we look to see how themes such as energy efficiency, for example, will impact them and their level of exposure to them. In the oil and gas sector, there will be some companies with higher sectors of gas in their portfolio – we might be far more positive to them because gas is a lower carbon fuel than oil. Then there's also the adaptation argument, which is a harder play because it has a medium term/longer term focus.

How do you start your search for companies then dovetail with the demands of the financial analysts?
With the climate change fund it's much more a thematic issue. We identify which companies should be included in the universe, then it's up for Simon Webber and Matthew Franklin, the fund managers, to cherry pick from the list of stocks we've chosen. So they must take the financials arguments on top of the climate change reasoning.

What does your part of the analysis involve?
Our analysis is identifying which companies have the potential to benefit financially from climate change. Nuclear power, for example, is likely to be one of the key players in helping us reduce CO2 emissions. We're positive on companies with exposure to nuclear power and generally are focusing on those manufacturing companies that make materials for nuclear power plants rather than nuclear plants themselves.

What information do you analyse to see whether a business should be included in the universe?
We look at all the issues we believe will have material impact, so that will vary depending on the sector. Take transport companies, for example. We see if they have more rail or coach exposure, work out their carbon footprint to some extent and also look how the company's services and products might benefit.

Have you identified companies that could be key players in a few years time, but are not necessarily right for the fund now?
Yes. Clearly some issues are much shorter term, energy efficiency being one example. The longer term issues will be things that affect physical impacts of climate change. With the threat of water shortages, we're looking at companies involved in both decontamination and also in developing structures for water transportation. But these are not quite on our doorstep just yet. So we're identifying them as companies of the future. As a future issue and one that is already happening now, we see the price of food increasing as a result of drought, population growth and changing demographics. The price of wheat, for example, has doubled over the last year. That’s been driven by the biofuel craze at the moment. Droughts going on in the wheat growing areas and population demand has lead to pizza prices increasing in Italy, so we’re seeing these issues start to integrate into society.

What's the crossover with what someone might describe as the ethical criteria?
Obviously climate change is the key environmental issue in the world today, so we've been looking at it through SRI [Sustainable and Responsible Investment criteria]. But now we have a much more dedicated focus on the topic, identifying what the key trends will be coming up over the shorter/medium term and how that's going to affect an industry. Then we identify the companies within the industries that are going to be affected.

People have talked of a green bubble occurring on the stock market, comparable with the dot com boom. Is this an accurate comparison?
I believe a slight difference with the dot com cap boom is that it was driven much more by market sentiment, whereas climate change is actual physical imposition on life resulting in environmental constraints. It is going to change industry in 20 to 50 years; it's going to be the biggest industrial driver and so comparing the tech dot com boom to green tech is slightly different because of the different drivers behind it.

Do you think the involvement of business and financial institutions will actually help tackle climate change itself?
I think it's what the politicians hope. There's a lot of ability for businesses to innovate, they clearly want to improve and influence their products and services. I think they're crying out for a lot more political sentiment, to make some tougher decisions about where and how they should structure their future, which isn't coming at the moment.

About Rick Stathers

Rick Stathers is an environmental analyst for the Schroders’ Global Climate Change Fund.

He previously worked as an environmental consultant and has provided expert feedback to the Carbon Disclosure Project and FTSE4Good climate change initiatives.