Funds for Bill Gates' Future Climate FAANGs

These funds could capitalise on clean energy and climate technology, but are they ready for pillar status in your portfolio?

Sunniva Kolostyak 9 November, 2021 | 3:22PM
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Bill Gates attends COP26 in Glasgow

The climate conference in Glasgow is now in its second week and we’ve seen some ambitious carbon reduction goals. The focus is now shifting towards how politicians will ensure a detailed roadmap to reach these targets.

A key theme in the conversation around the energy transition is climate technology: even Bill Gates has stated that the next generation of FAANGs will be climate tech companies. So what are the investment opportunities?

The numbers

Europe is by far the largest and most diverse fund universe for climate-aware strategies, with 426 products totalling €186 billion in assets. Climate funds have been among the best-selling funds too. Inflows this year account for about 60% of the broader sustainable European fund universe, according to Morningstar data.

We’ve been digging through that information to identify the financial products available to investors interested in climate technology. The great news is that this area is currently receiving a lot of attention, so investors have several options.

That said, it is a relatively new phenomenon, so there is no guarantee any of the products are viable long-term options. In the UK, 23 funds have a climate focus, covering low carbon companies (3), those with climate consciousness (11), those contributing or manufacturing climate solutions (7), and companies in the clean energy/tech (2) world.

The two clean energy/tech funds are Schroder Global Energy Transition, which was launched less than a year ago, and the 3-star VT Gravis Clean Energy Income, launched in 2017. Both manage around £400 million.

More broadly, across Europe, there are an additional 56 clean energy/tech products available for sale. Of these, only 10 launched in 2021, while 11 are categorised as SFDR Article 8 funds and 16 funds are Article 9 (we have previously written about what the EU categories are and the real difference between Article 8 and 9 funds for investors).

Another issue with equity funds is that they are reliant on a necessary ingredient: publicly traded companies. Those are few and far between, compared to privately-held ones, and are largely concentrated in competitive industries such as solar panel manufacturing.

According to data from Morningstar company Pitchbook, venture capital funds have poured more than $14bn into climate tech start-ups so far this year.

Moreover, global investors have already closed as many climate-focused funds in 2021 as were raised during the previous five years combined. Finally, climate technology itself is a diverse sub-industry, including categories as wide-ranging as food and mobility systems.

Opportunities and risk

One way to get exposure to unlisted stocks is ETFs. Of the 86 European products, nine are ETFs. The two biggest, iShares Global Clean Energy (AUM: €4.9 billion) and Lyxor New Energy (AUM: €1.2 billion) have 3 and 4 Stars, respectively, and a high and above average sustainability rating.

One rated fund did make the list: the neutral RobecoSAM Smart Energy Equities. This Article 9 fund has about €3.4 billion in AUM, a high sustainability rating, and has returned 23.19% so far this year. The fund was, however downgraded from Silver to Neutral by our analysts because it lost its entire team after the lead manager left the firm.

Several funds do have star ratings, which means they have been reporting for over three years and are a member of a Morningstar category. In Europe, 23 of the funds do have star ratings, while 36 have a sustainability rating (18 high, 15 above average, one average, two below average).

So what should investors do? The combination of industry immaturity and current holdings concentrations in sub-industries like solar panel manufacturing make investing in climate tech a daunting proposition.

Nevertheless, there is still a host of opportunities. As Gates implies, climate tech companies will inevitably go public in the future, meaning the options for retail investors will get better.

In the meantime, such strategies are far from ready to play a core role in a healthy portfolio. The adventurous would be wise to do more homework than usual before jumping in.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Sunniva Kolostyak  is data journalist for Morningstar.co.uk