x Abu Dhabi, UAEWednesday 24 January 2018

Awaiting the big green payoff

For years experts have been saying that green investments are the next megatrend, but it hasn't happened yet.

Employees work on a section of the Pelamis P2 Wave Energy Convertor, manufactured by Pelamis Wave Power Ltd, as it sits in the water at Leith docks in Edinburgh, Scotland.
Employees work on a section of the Pelamis P2 Wave Energy Convertor, manufactured by Pelamis Wave Power Ltd, as it sits in the water at Leith docks in Edinburgh, Scotland.

The future is green, they tell us. The future is a low-carbon, energy-efficient world powered by sunlight and seaweed, biofuel and breezes. In this bold new eco-friendly future, fossil fuels will soon become a relic of the polluted past.

Investment analysts and mutual fund managers call it the new green megatrend. They say this is a great new growth area for investors, who can save the planet and make money at the same time.

They have been saying it for years, but unfortunately, it hasn't happened. We still burn oil as if it was an endless resource. China still opens a coal-fired power plant every week. We still take cheap flights, drive 4x4s, poison the oceans and hack down rainforests. And despite the endless chatter about global warming, we pumped a record 30.6 gigatonnes of carbon dioxide into the atmosphere last year.

Anybody who has invested in the green megatrend won't have saved the planet, but they will have lost money. Green is good, but it will have been very bad for your pension fund. And yet they call it responsible investing.

The past five years have been a rotten time for equities, with the average US offshore fund down 7 per cent and UK fund down 3 per cent, but most green funds have turned out to be real stinkers.

Over the past five years, the average fund in the offshore ethical sector has fallen 18 per cent, according to figures from Trustnet.com.

Yet logic suggests the green megatrend must happen at some point.

Thanks to the rise of China and India, the world is hungrier for energy than ever before. Despite the downturn, global oil demand is set to hit 90 million barrels per day this year, up from 87.4m last year. Oil will eventually peak, then start running out. The planet is warming and urgently needs alternatives. When green energy eventually hits critical mass, wouldn't you want to be part of it?

The first green, or "ethical", fund was the Stewardship fund, which was launched in 1984 in the UK by Friends Provident, the fund manager. At the time, it was dismissed as strictly for sandal wearers and muesli munchers, but the sector has grown in popularity ever since.

There are now scores of specialist environmental funds with different remits, including a range of offshore mutual funds, such as the Blue and Green fund from JP Morgan Investment Funds, Aberdeen Global Responsible World Equity, Impax Environmental Markets, Lloyd George Asian Green and FBI BlackRock New Energy.

You might have the odd ethical fund in your portfolio, although you are unlikely to have made much money from it.

A handful of offshore funds have posted positive returns. Lloyd George Asian Green is up 11 per cent over three years, while the JP Morgan Blue and Green fund is up 7 per cent, but most green funds are deep in the red.

Take BlackRock New Energy. This should have everything going for it. BlackRock is the world's largest money manager and this fund boasts two experienced managers, Robin Batchelor and Poppy Allonby, who have been in the post for a decade. The fund invests in hot new sectors, including alternative fuels, renewable energy, power generation, materials technology and green-energy storage. Yet it is down a whopping 50 per cent over the past three years.

This reflects the volatility of green and alternative energy, says James Thomas, the regional director at Acuma Wealth Management in Dubai. "The sector has been regularly hailed as the next best thing, but it still hasn't taken off. The cost of investing in new energy and concerns about its ongoing viability has hit performance. Wind farms, for example, are massively expensive compared to the electricity they generate and this makes it difficult for private companies to give investors a reasonable return. It is a potentially exciting sector to invest in, but it may not generate the returns you expect."

There have been one or two successes. Mr Thomas picks out Premier New Earth Solutions Recycling Facilities, an offshore mutual fund from Premier Group, which has grown 41 per cent over the past three years. This fund is about as specialist as it gets. "It focuses on efficient disposal of waste through recycling, efficient incineration and power generation. It has performed well and the story is a powerful one."

Another danger of investing in alternative energy is that many of the companies are pioneering new technology, whose commercial application remains unproven. There are safer ways of investing in the new energy future, Mr Thomas says. "It might be wiser to diversify by investing in a combination of new and traditional energy. Many of the oil majors, such as BP and Shell, are investing heavily in new energy, so you are able to get exposure to both sectors with the same holding."

The pale performance of green funds hasn't deterred some fund managers from entering the sector. L&G Investments (LGI), a UK-based fund manager, was recently talking up the green megatrend after launching a passive tracker called the Global Environmental Enterprises Fund.

As the world gets hotter, we're going to have to be much more efficient in how we use energy, says Simon Ellis, the managing director of LGI. "Finding alternative forms of energy has become more pressing following the Fukushima nuclear plant meltdown in Japan, Germany's subsequent decision to eradicate nuclear reliance by 2020, extreme weather in Asia and Africa, and growing energy and water security fears."

Whatever your views on anthropogenic global warming, you can't deny that energy efficiency and controlling water, waste and pollution are all worthy goals. But so far at least, good intentions have made bad investments.

Investing in alternative energy companies now is like investing in individual technology stocks during the dotcom boom, says Mark Dampier, the head of research at Hargreaves Lansdown, a UK-based independent financial adviser. "There will be some big winners; we just don't know who they are yet. For every company that makes a green-energy breakthrough, dozens will go bust. Amazon, Google and eBay were all big winners in the technology boom, but it was impossible to identify them at the time."

Too much green technology relies on government subsidies, notably wind power. "Wind is unreliable and you need fossil fuel back up when the wind doesn't blow. What if political fashion changes and the subsidies dry up? That instinctively makes me nervous."

Mr Dampier is sceptical about the green megatrend, but says energy is a key investment sector. "I just wouldn't limit myself to a specialist alternative energy fund because the manager is investing with one hand tied behind their back."

Unless you are a committed environmentalist, you need access to fossil fuels as well. "Oil still powers the industrial world. Your car doesn't run on biomass, nor does the global economy, so why should it power your portfolio?"

Mr Dampier recommends two mutual offshore funds that could help you play the energy sector: Schroder ISF Global Energy and Hansard International Investec Global Energy, although both are heavily invested in oil and gas companies rather than alternatives.

The green megatrend is a great marketing label, but it might also be a lot of hot air. In 2007, a spate of new fund launches attempted to cash in on efforts to combat climate change. F&C Global Climate Opportunities, Schroder Global Climate Change and the Virgin Climate Change Fund were launched within months of each other - and have performed disastrously ever since.

The F&C and Schroder funds, both available offshore, are down 28 per cent and 17 per cent respectively over three years. Richard Branson's UK-based fund is down 27 per cent over the same period.

Renewable energy is a great story, but as an investment it has much to prove, says Patrick Connolly, an investment specialist at AWD Chase de Vere. "Some companies do have the potential to make strong returns, but they must be considered high risk and unsuitable for the vast majority of investors. This sector should only be considered by those who already have a significant and diversified investment portfolio, and are prepared to accept the risks involved."

The world certainly faces plenty of energy and environmental challenges. There are 6.93 billion people on earth, and most of them would like to raise their consumption to western levels.

We have seen the result in food and fuel shocks, the Arab Spring and emerging markets inflation. Unless we find an alternative to our declining oil reserves, things could get much worse.

Wind, solar, wave, biomass, ground-source heat pumps or thorium (or a combination of all of them) could one day save the day. China has seen the potential and is set to become the world's major green-energy producer.

At some point, the green megatrend will take off and make some lucky investors rich, but for most people, the risks will outweigh the potential rewards.

The sector is also prone to sudden swings in fashion. Look at nuclear power. It was boycotted for decades following the Chernobyl meltdown, swung back into eco-fashion as a practical form of low-carbon energy to fight global warming, then washed away almost overnight in the Japanese tsunami.

The green megatrend could be the ultimate contrarian play if you are brave. But as any action hero knows, saving the planet is always a risky business.