Three years after the Paris agreement – an agenda that set a target for countries to keep the global average temperature rise to below 2°C pre-industrial levels – the latest data shows that we are already failing, as the temperature has increased by 1-2 per cent.
With the temperature rising faster than anyone expected, experts fear that climate change is accelerating and this will undoubtedly have an impact on the global economy and markets, according to Jon Forster, senior fund manager of the £535.6m Impax Environmental Markets trust.
Impax Environmental Market invests in companies that work for the cleaner or more efficient delivery of basic services of energy, water and waste. It has a focus on ‘pure play’ stocks, that is companies with more than 50 per cent of their revenue, profits or capital in environments markets.
Forster argues that, whilst environmental markets have never been stronger, the global climate issue has dramatically damaging effects for the wider global economy.
“With higher global temperatures comes more volatile climate and more extreme weather events: increasing numbers of droughts, floods, hurricanes, etc. It's one followed by the other,” he said.
The escalating global temperature predictions from 1900 to 2100
Source: Unites States Environmental Protection Agency (EPA)
“What that does is place a whole new level of stress and strain on infrastructure and creates the need for solutions. All these weather events are wreaking financial havoc with the global economy.”
A recent example of this, according to the manager, is the fact that the impact of the hurricane season has cost the US some $320bn in the last two years alone.
But whilst the worsening climate can damage the global economy, it is creating a range of investment opportunities within the sustainability sector.
The Impax Environmental Markets manager said that one key area was those businesses that provide mitigation solutions for climate change issues.
“We believe is that climate change is real and it’s very significant as a challenge and an opportunity for the businesses that have provided solutions to the climate change issues,” he explained. “The economics of renewables are good and there's a range of different opportunities for investment.
“One is with location, where you're effectively preventing climate change by reducing emissions. And the second is adaptation, where you're coping with the outcomes of a more volatile climate. Or mitigation is energy efficiency, renewable energy or agriculture efficiency.”
In positioning his trust to capitalise on those opportunities, Forster has a 30 per cent exposure in companies that develop sustainable energy efficiency, which he says is a much bigger opportunity as they compete with gas and coal.
The US electricity generation by major energy source, 1950-2018
Source: US Energy Information Administration (EIA)
Whilst Forster argued that the market for sustainable energy looks set to continue growing, he added that politics can be of a significant benefit as regulation is introduced to meet climate change goals and other targets.
“The myth that environmental markets rely on environmental subsidies for returns persists,” he said.
“The reality is that we benefit from the tightening of regulation and it isn’t just environmental regulation. Tightening standards in recycling, water quality, building regulations, emissions, food standards – you name it, they all demand more resource efficient solutions.”
He sees these opportunities only growing as governments around the globe step up to the challenge of tackling environmental problems and climate change.
“The science of climate change is no longer in doubt and what is clear is that, on its present trajectory, the economy cannot react quickly enough to the climate challenges we are facing,” he explained.
“Governments will turn up the ratchet of regulation, which will in turn encourage action – we’ve seen this most recently with the war on plastic, for which the regulatory response has been unprecedented.
“It's an area that benefits from tightening regulations, energy efficiency standards that are only getting tighter over time, and then with a huge catch up story in emerging markets as well.”
Impax Environmental Markets invests in four main themes across its portfolio – new energy, water, waste/resource recovery and sustainable food, agriculture & forestry. Top holdings including Austrian wood-based fibre firm Lenzing AG, Australian reusable pallet stock Brambles and Portuguese renewable energy company EDP Renováveis.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The trust has made a 99.54 per cent total return over the past five years, compared with a 28.46 per cent gain for its average IT Environmental peer and 72.57 per cent from the MSCI AC World index.
Impax Environmental Markets has ongoing charges of 1.04 per cent, is trading on a 0.5 per cent premium to net asset value and yields 1 per cent. It is 3 per cent geared, according to the Association of Investment Companies.