How do You 'Temperature Test' a Climate Fund in 2023?

VDIEO: As a new year approaches, Ollie Smith asks Fulcrum climate change fund manager Fawaz Chaudhry for his take on climate investing

Ollie Smith 14 December, 2022 | 8:40AM
Facebook Twitter LinkedIn



Ollie Smith: Now, if you're concerned about climate change and rising global temperatures, the next fund manager methodology might be of interest to you. Joining me in the studio is Fawaz Chaudhry, who manages the Fulcrum Climate Change Fund.

Fawaz, can you just tell me first and foremost before we get on to anything about measuring temperature, what's the fund's performance been, particularly in light of global equity turbulence this year?

Fawaz Chaudhry: Thank you. The fund was launched in August 2020, and it has outperformed global equities since then. This year, it's down on the year, in line with global equities. The fund does not have a sector or regional bias. So, energy's outperformance or tech's underperformance does not impact as such.

OS: Okay, cool. And speaking of cool, you temperature test your portfolio. Can you talk me through how that actually works? How common is that in this world?

FC: So, Climate Change Fund is what we call an aligned fund. So, basically, we only own equities which are aligned with the Paris Accord, so they are decarbonizing. So, every single company has already given targets to decarbonize their respective businesses, and this is measured by a third-party data provider, S&P Trucost, in our case, and the other data providers are also available. So, we only choose from those, but then only put them together in a package where there's no regional or sector bias and has lower volatility versus global equities.

OS: Okay. So, if you don't mind me asking, I'd be intrigued to know given those kinds of accords and agreements are a moving picture, they're being added to by the various COP conferences and by essentially geopolitical events, how nimble do you have to be as a fund manager?

FC: So, because we rely on a third-party data provider, who have an army of analysts measuring both the historic carbon emissions and future carbon emissions, so yes, the universe of available equities is growing because more and more companies are giving targets which are aligning themselves. From within that universe, we can then pick the securities in the Climate Change Fund. So, in essence, we are relying on both businesses to take the onus on themselves to decarbonize their portfolios, make public announcements and for a third-party data provider to recognize that and to give us a pathway for their decarbonization. We then take that pathway and translate that into a single number, which is the temperature of the security, and that number is then translated into the temperature of the fund by some rate of all the securities in the fund.

OS: I'm intrigued. Do you ever see any setbacks in the data where there's specific companies that perhaps don't meet their own ambitions?

FC: Yes. So, there is a forecast element to decarbonization. So, there's a weight given to historic emissions, but a weight given to forecast missions. Now, if companies do not stick to what they had projected a year down the road or two years down the road, effectively their temperature is penalized and goes up, and they might fall out of the purview of the fund. Yes, that's exactly right.

OS: Okay. And then, just finally, I mean, what are your thoughts on 2023 as the fund manager here?

FC: So, equities are obviously – global equities are underperforming for the year. They're down based on inflation data and higher interest rates. They're mostly derated. And earnings recession is now on the cards, especially in Europe. Multiples have come down a lot for global equities. Looking forward, we feel global equities are probably going to perform relatively well compared to, for example, bonds which are less well suited in an inflationary environment. Within that, we feel energy, value-related businesses will generally perform well. In our particular strategy, we feel there's a long-term element to gain from decarbonization. And as the true cost of carbon keeps coming through, our portfolio should outperform global equities.

OS: Okay. Thank you very much. For more on the future of climate investing, check out our Special Report Week on the investment outlook for 2023. Until next time, my thanks Fawaz. I've been Ollie Smith for Morningstar.

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.

Facebook Twitter LinkedIn

About Author

Ollie Smith

Ollie Smith  is editor of Morningstar UK

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures