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600 Ways to Invest in the Fight Against Climate Change

In this article we sort out the climate-focused fund landscape to help investors all over the world decarbonize their portfolios and help finance the transition to a low-carbon economy.

Sylvester Flood 9 February, 2022 | 3:59PM Sunniva Kolostyak
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Find Climate Funds You Can Buy Right Now

Investors have a growing number of choices to seize climate-change-related opportunities, as well as to mitigate climate risk in their portfolios. Use this table to find funds available in your country.



How We Look at Climate Product Options

We divide climate products into five categories:

  1. Low Carbon funds seek to invest in companies with reduced carbon intensity and/or carbon footprint relative to a benchmark index. These funds are well diversified.
  2. Climate Conscious funds select or tilt toward companies that consider climate change in their business strategy and therefore are better prepared for the transition to a low-carbon economy. These funds are also well diversified.
  3. Climate Solutions funds only target companies that are contributing to the transition to a low-carbon economy through their products and services and that will benefit from this transition. These funds are less well-diversified and tilt toward industrials and technology.
  4. Clean Energy/Tech funds invest in companies that contribute to or facilitate the clean energy transition. These funds are concentrated in the industrials and technology sectors.
  5. Green Bond funds invest in debt instruments that finance projects facilitating the transition to a green economy.


This graphic indicates the different roles that these strategies play in portfolios.

Climate Strategies and Their Role in Portfolios

 

Many Choices, But Relatively Few Have Long Track Records

The good news is that the investment industry has introduced a multitude of new funds globally to capture investor interest in investing in climate change, or, if you like, the energy transition.

Yet, many of these choices are unproven and much more volatile than diversified equity funds. As of the end of last year, US-domiciled climate tech funds had an average three-year standard deviation of 29.5 versus 18.4 for the Vanguard 500 fund, which tracks the S&P 500 benchmark. (Standard deviation is a measure of risk. The higher the number, the riskier the asset has been in the past.)

That’s where the Morningstar Rating for funds, known as the star rating, comes in. We've sorted the table above by this rating, which measures whether a fund has performed well on a risk-adjusted basis against its peers. For more background on its use and efficacy, read this column from Morningstar’s funds columnist John Rekenthaler.

 

This article contains material from Morningstar authors Jon Hale, Hortense Bioy, and Elizabeth Stuart

Read This Before You Start Investing in Sustainable Funds

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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

Sylvester Flood  is Morningstar's Chief Content Strategist.

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